How much does the business group matter in Korea?

We partition the variances of profits of the companies associated with Korean business groups into business group‐specific effects, industry effects, and affiliate company‐specific effects, which roughly match corporate‐parent effects, industry effects and business unit effects, respectively, in the extant literature. We find substantial corporate‐parent effects (here, business group effects) along with industry effects and business unit effects (here, affiliate company‐specific effects). This finding may indicate that business groups play an important role in developing countries by circumventing market inefficiencies. Our results also suggest that these effects tend to be smaller in large business groups and to decrease over time. Copyright © 2002 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.     

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     

A new perspective on a fundamental debate: a multilevel approach to industry,corporate, and business unit effects

We utilized a multilevel approach to both estimate the relative importance of industry, corporate, and business segment effects on firm performance, as well as to demonstrate how it enables the investigation of specific strategic factors within each class of effects. Our results confirmed previous findings suggesting that although business segment effects carry the most relative importance, industry and corporate effects are also important. Among the findings regarding specific factors, we found that industry concentration and munificence, as well as the resource environment provided by corporate parents, impact performance. These findings suggest that investigators should consider both industry and corporate environments when examining performance. Copyright © 2006 John Wiley & Sons, Ltd.     

How much does industry matter?

This study partitions the total variance in rate of return among FTC Line of Business reporting units into industry factors (whatever their nature), time factors, factors associated with the corporate parent, and business-specific factors. Whereas Schmalensee (1985) reported that industry factors were the strongest, corporate and market share effects being extremely weak, this study distinguishes between stable and fluctuating effects and reaches markedly different conclusions. The data reveal negligible corporate effects, small stable industry effects, and very large stable business-unit effects. These results imply that the most important sources of economic rents are business-specific; industry membership is a much less important source and corporate parentage is quite unimportant.     

Does country matter?

Previous studies have explored the predictors of business unit performance in multiple‐business firms and investigated the extent of the effect of industry, corporate, and business unit on the performance of a business unit. These studies have focused almost exclusively on examining performance differences within a single country, thus treating country effects as external to business unit performance. In contrast, this study focuses on multinational corporations and examines the extent to which country effects explain the variation in the performance of foreign affiliates. Our findings show that country effects are as strong as industry effects, following affiliate effects and corporate effects. Our results also suggest that corporate and affiliate effects tend to be more critical in explaining the variation in foreign affiliate performance in developed countries, whereas country and industry effects are more salient in developing countries. Copyright © 2004 John Wiley & Sons, Ltd.     

Industry,corporate, and segment effects and business performance: a non‐parametric approach

The literature investigating the degree to which firm performance is associated with industry or corporate factors has recently been subject to criticism on the grounds of both methodological shortcomings and incomplete interpretation of results. Our research goes beyond these critiques to raise more basic issues concerning the assumptions underlying variance decomposition, the methodology dominating the antecedent literature. Performance data and categorizations from a sample consistent with those employed in the recent literature are analyzed via a new non‐parametric methodology. Results here indicate that corporate factors were over an order of magnitude better predictors of business unit profit position than were industry factors—which were found not to have been significant predictors. Further, underlying performance relationships were seen to have shifted over time. A key implication of these results for researchers is that they provide additional evidence that managers can have a strategic influence on business performance. Copyright © 2003 John Wiley & Sons, Ltd.     

What does a small corporate effect mean? A variance components simulation of corporate and business effects

In a widely cited paper, Rumelt (1991) presents estimates of the relative influence of corporate, business unit, and other influences on business unit profitability and finds the corporation explains almost none of the variability in business unit profitability. Using a Monte Carlo simulation, we examine the relation of variance component magnitudes to other indicators of the importance of a particular effect. Our results demonstrate that variance components can be an extremely nonlinear indicator of importance. We also question whether Rumelt's corporate effect represents the possible contributions of corporate strategy to business unit performance. This addresses a puzzle raised by Rumelt (1991) concerning the small effect of corporations in explaining performance, and suggests that Rumelt's findings should not be seen as demonstrating the insignificance of corporate strategy. © 1997 John Wiley & Sons, Ltd.     

Motivation matters: Corporate scope and competition in complementary product markets

Research summary : We argue that a pure capabilities‐based view does not accurately explain the competitive dynamics of increasingly common settings in which firms act as both complementors and competitors. We propose that the Awareness‐Motivation‐Capability framework is more appropriate for these settings. We derive predictions from both a pure capabilities view and the AMC framework, and test those predictions in the U.S. auto leasing market, in which the leasing subsidiaries of car manufacturers directly compete with the same independent lessors who provide complements to the manufacturers. Although our results are consistent with capabilities playing an important role, motivation appears to be a critical factor explaining the competitive dynamics of the market. Managerial summary : Firms that compete with business units owned by larger corporate parents face additional considerations. Such subsidiary competitors can be motivated by broader corporate considerations, shifting their objectives, and consequently, their strategic actions. Expecting subsidiary competitors to pursue business unit profitability can mislead managers toward pricing, product mix, or market entry errors. We present an important example from consumer finance, where independent auto lessors, such as Bank of America (BoA), compete with captive leasing subsidiaries like Ford Motor Credit (FMC). Since FMC is motivated to subsidize and support vehicle sales for its manufacturer parent, a cost advantage is not enough for BoA to dominate the market. Understanding broader corporate motivations of competitors helps managers anticipate competition levels in potential markets, thereby improving decision‐making and performance. Copyright © 2015 John Wiley & Sons, Ltd.     

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.     

Size and relatedness of units sold: An agency theory and resource-based perspective

This study tests the effects of ownership concentration, outside director equity holdings, and corporate strategy on, and the Performance implications of, the size and relatedness of units sold by parent firms. The study is based on a model that integrates agency and resource-based theories, and a sample of sell-offs by 112 Fortune 500 firms. Ownership concentration is found to be associated positively with the sale of unrelated and small units. This relationship is strengthened when outside director equity is high. In addition, the effects of corporate strategy types on the characteristics of units sold depend on ownership concentration and outside director equity. Finally, post'sell-off performance of the parent firm is associated negatively with the relatedness of the unit sold. These results suggest that the type of unit sold depends on the type of economic benefit sought by the parent firm.     

The impact of modes of entry and resource fit on modes of exit by multibusiness firms

This study examines the choices of modes of entry and exit in the process of new business exploration. We find that exit mode choices are determined by a different set of factors from those that are important for the entry mode decision and the exit decision per se. Our study indicates that when the resource profiles of a parent firm and the business unit are more dissimilar, and there has been less development of firm‐specific idiosyncratic assets, firms are more likely to sell businesses than dissolve them. Further, the study reports a strong relationship between the mode of exit from a line of business (sell‐off vs. dissolution) and the original mode of entry (acquisition versus internal development). Copyright © 1999 John Wiley & Sons, Ltd.     

Equity‐based incentives and collaboration in the modern multibusiness firm

Research summary : This paper examines the role of equity‐based incentives in fostering cross‐business‐unit collaboration in multibusiness firms. We develop a formal agency model in which headquarters offers equity and profit incentives to business‐unit managers with the objective of maximizing total expected firm returns. The resulting compensation contract provides a rich mechanism for aggregating value from collaborative interactions across business units, aligning managers' efforts with the firm's growth prospects and organization structure and managing the dual risks in profits and firm market value. The inclusion of equity incentives elicits higher levels of own‐unit and collaborative efforts over the profits‐only contract. Our results suggest that equity‐based incentives are most beneficial when profitability is uncertain relative to long‐term growth prospects, in firms pursuing related diversification strategies, and in periods of rising equity markets. Managerial summary : Equity‐based compensation such as restricted stock grants and options are increasingly common, not only for CEOs and other top executives, but also for business unit managers and other non‐C‐suite employees. The paper studies the role of such “global” incentives in enabling multibusiness firms to benefit from cross‐unit collaboration. Results from our model show that managerial contracts that include appropriate levels of equity incentives, in addition to profit‐based incentives, generate higher own‐unit and collaborative efforts. We also find that equity incentives are likely to be most beneficial for large firms in high‐growth sectors, for firms pursuing a related diversification strategy, and in periods of rising stock markets. The model can also provide useful guidance on designing return‐maximizing compensation contracts for business unit managers in different firm, organizational, and industry contexts. Copyright © 2015 John Wiley & Sons, Ltd.     

Examining a key corporate role: The influence of capital allocation competency on business unit performance

Research on the role of the corporate office in firm performance has focused on establishing how much performance variance can be attributed to a “corporate effect,” with little attention devoted to understanding how this influence occurs. In this study, we model capital allocation competency as a dynamic managerial capability and find that lower levels of allocation competency in the form of excess investment to business units with relatively poorer future prospects reduce business unit performance. We also find that market conditions affect performance implications of capital allocation—allocation competency is more salient in more competitive markets. These results enhance our understanding of how the corporate office influences business unit performance through its role in allocating capital across business units. Copyright © 2014 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.     

Who does private equity buy? Evidence on the role of private equity from buyouts of divested businesses

Research Summary: We examine the role of nonventure private equity firms in the market for divested businesses, comparing targets bought by such firms to those bought by corporate acquirers. We argue that a combination of vigilant monitoring, high‐powered incentives, patient capital, and business independence makes private equity firms uniquely suited to correcting underinvestment problems in public corporations, and that they will therefore systematically target divested businesses that are outside their parents’ core area, whose rivals invest more in long‐term strategic assets than their parents, and whose parents have weak managerial incentives both overall and at the divisional level. Results from a sample of 1,711 divestments confirm these predictions. Our study contributes to our understanding of private equity ownership, highlighting its advantage as an alternate governance form. Managerial Summary: Private equity firms are often portrayed as destroyers of corporate value, raiding established companies in pursuit of short‐term gain. In contrast, we argue that private equity investors help to revitalize businesses by enabling investments in long‐term strategic resources and capabilities that they are better able to evaluate, monitor, and support than public market investors. Consistent with these arguments, we find that when acquiring businesses divested by public corporations, private equity firms are more likely to buy units outside the parent's core area, those whose peers invest more in R&D than their parents, and those whose parents have weak managerial incentives, especially at the divisional level. Thus, private equity firms systematically target those businesses that may fail to realize their full potential under public ownership.     

The relative influence of industry and corporation on business segment performance: an alternative estimate

Rumelt’s (1991) widely cited paper presents estimates of the relative influence of industry, corporate, business unit, and other influences on business unit profitability. He finds corporations explain almost none of the variability in business unit profitability. Using a simultaneous equation model, we provide alternative estimates of the influence of industry and corporation on business unit performance. We find that both corporations and industries influence business unit profitability but corporations have the larger influence. Copyright © 1999 John Wiley & Sons, Ltd.     

Corporate Governance and returns on information technology investment: evidence from an emerging market

Prior studies have reported mixed findings on the impact of corporate information technology (IT) investment on firm performance. This study investigates the effect of corporate governance, an important management control mechanism, on the relation between IT investment and firm performance in the Taiwanese electronics industry. Specifically, we explore board independence and foreign ownership, which have increasingly become salient factors concerning corporate governance in emerging markets. We address their roles across firms of different sizes and in industries where degrees of competitiveness run a wide gamut. Our results show a positive moderating effect of board independence on the IT investment‐firm performance relation, especially when competition intensifies. Furthermore, we find that the greater the foreign ownership in small firms, the more positive the IT investment‐firm performance relation, suggesting that foreign investors may bring IT expertise to help small firms reap the benefits of using IT. Copyright © 2010 John Wiley & Sons, Ltd.     

Product‐market strategy and the marketing capabilities of the firm: impact on market effectiveness and cash flow performance

We report on two studies (a single and a multi‐industry) that empirically investigate a nomological network of relationships between strategic business unit product‐market strategy (differentiation, cost‐focus, and product‐market scope), marketing capabilities (architectural and specialized capabilities, as well as their integration), and business unit performance (market effectiveness and subsequent one‐year objective cash flow), along with a series of controls. Addressing important lacunae in the resource‐based view our main research objective is to augment understanding of how critical firm‐level marketing capabilities enable the realization of strategy, thus, further advancing both the resource‐based view and more recent capabilities theorizing. Specifically, we test seven hypotheses and find strong evidence that both architectural and specialized marketing capabilities, and their integration, positively mediate the product‐market strategy and derived business unit performance relationship. In contrast to many extant studies, both survey and objectively measured data are combined, and because the secondary data collected contains both resource‐level (input) data and subsequent one‐year financial data, a higher level of confidence may be attributable to our findings. Copyright © 2009 John Wiley & Sons, Ltd.