Firm and Industry effects within Strategic Management: An empirical Examination TORIo Alfredo J. Mauri: Max P. michaels Strategic Management Journal, Vol 19, No. 3(Mar, 1998), 211-219. Stable url: http://links.jstor.org/sici?sici=0143-2095%028199803%02919%03a3%03c211%03afaiews%03e2.0.co%3b2-x trategic Management Journal is currently published by John Wiley Sons Your use of the jStOR archive indicates your acceptance of JSTOR,'s Terms and Conditions of Use, available at http://www.jstor.org/about/terms.htmlJstOr'sTermsandConditionsofUseprovidesinpartthatunlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://wwwjstor.org/journals/jwiley.html Each copy of any part of a STOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission jStOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support @ jstor. org http://www」]stor.org Wed nov211:59:36200
Strategic Management Journal, Vol. 19, 211-219(1998) FIRM AND INDUSTRY EFFECTS WITHIN STRATEGIC MANAGEMENT: AN EMPIRICAL EXAMINATION ALFREDo J. MAURIand MAX P MICHAELS2 "Baruch College, University of New York, New York, U.S.A Mckinsey Co New York U.s.A his study brings out the complementarities between resource-based and industrial organizati schools within strategic management through an empirical examination of firm and industry effects. A variance component analysis of 264 single-business compa 69 industries using 5-and 15-year periods suggests that firm effects are more important than industry effects on firm performance, but not on core strategies such as technology and marketing. The finding also point to the need to study core strategies at lower levels of aggregation to understand the sources of competitive advantage, o 1998 John Wiley Sons, Ltd Srat.Mgmt.J,vol.19,211-219,1998 INTRODUCTION bert, Phillips, and Westfall, 1996), and eported contradictory findings. None of the Firm effects and industry effects capture the studies has examined the firm effects on strategies degree of heterogeneity within an industry. They though it would help us understand why firms underlie several important concepts in strategic differ'( Carroll, 1993; Nelson, 1991 management such as distinctive competence and This study seeks to bring out the complemen Yet two schools with nificant influence in strategic management have industrial organization through an empirical been at odds with one another regarding the analysis. We estimate the firm and industry magnitude and persistence of firm effects. The effects on core strategies as well as performance dominat anizavo ant an argues that firm heteroge- using a sample of nondiversified companies over neity Is ersistent, whereas indus- 5-year and 15-year periods. The results show the suggests that industry effects predominance of firm effects on performance but not on core strategies such as technology and Not only is there conflicting theoretical guid- marketing ance, but there have also been few empirical studies. These empirical studies have focused on the performance variation among firms and indus- DIFFERENT PERSPECTIVES ON tries(Schmalensee, 1985; Rumelt, 1991; Roque- FIRM AND INDUSTRY EFFECTS Firm effects capture the unique firm character- istics which influence the variation in strategies *Correspondence to: Alfredo J. Mauri, Baruch College, and performance outcomes across industries and f New York, 17 Lexington Ave, New York, firms, and indr ffects refer to attributes *This research was undertaken while the author was a student mon to an industry. The dominance of firm eff suggests heterogeneity because of barriers to CCC0143-2095/98/030211-09$1750 Received 3 May 1995 e 1998 John Wiley Sons, Ltd Final revision received 6 May 1997
212 A.. Mauri and M. P. Michaels tation(Rumelt, 1991)and the inability of firms achieve the long-term goals and objectives of the to change their resource endowments over time enterprise( Chandler, 1962: 383 ). These resource (Carroll, 1993). In contrast, the dominance of allocation patterns(Mintzberg, 1978)underscore dustry effects over time shows the similarities the concept of strategic choice( Child, 1972) in response to industry conditions and the imi- Resources can be classified as financial, physi tation of successful strategies cal, human, technological, and organizati The emerging resource-based view of the firm (Grant, 1991). The proponents of the resource- (Wernerfelt, 1984: Barney, 1991; Conner, 1991; based view have concentrated on unique resources Grant, 1991; Mahoney and Pandian, 1992; Pet- from which companies may derive sustainable eraf, 1993)focuses on firm effects as the basis competitive advantage. According to them, only for sustainable competitive advantage. In this per- those resources that are valuable, rare, nonsubsti spective, unique resource and idiosyncratic proc- tutable, and difficult to imitate would provide esses drive heterogeneity among firms. Such competitive advantage and become the source of unique resources can provide competitive advan- economic rents(Barney, 1991; Peteraf, 1993) tage when protected from imitation and effective We term these key resources core resources, and 1982).Thus, the resource-based view suggests Interestingly, both the resource-based strategies isolating mechanisms (Lippman and Rumelt, the strategies based on them as core that firm-specific attributes drive both strategies industrial organization consider core and performance outcomes, which stands in sharp based on technological and marke contrast to the predominance of market structure tiation as determinants of performance(Dierickx in the industrial organization literature. and Cool, 1989; Scherer and Ross, 1990). The proponent of industry effects on following sections distinguish between firm- and strategies and performance is industrial organi- industry-level drivers of these strategies and per zation. Several schools within industrial organi- formance outcomes zation have proposed market structure as the prin- cipal explanation for the emergence of common Firm-level drivers terms of behavior and similar performance out- omes for firms in the same industry. However, The resource-based view inherently offers an some of its schools differ regarding the dynamics explanation for the firm effects on strategies and f industry structure. The traditional school performance outcomes within the same industry Bain/Mason)views market structure as exogen- The key dimension of differences in strategies ous and stable(Bain, 1972; Caves, 1980; Porter, and performance levels among competitors within 1981), while the Schumpeterian and Chicago an industry is the existence of unique firm charac- schools view market structure as dynamic and teristics capable of producing core resources that nstantly evolving. The Schumpeterian school are difficult to imitate(Wernerfelt, 1984; Barney, focuses on revolutionary innovations that make 1986: Peteraf, 1993). These core resources are rivals' positions obsolete and change industry developed internally (Dierickx and Cool, 1989) structure. Similarly, the Chicago school (Stigler, through sustained investments in difficult-to-copy 1968: Demsetz, 1973)believes in the convergence attributes( Barney, 1986) by managers commit- of competitive patterns over the long term when ting to irreversible strategic actions( Ghemawat, the less successful firms imitate the strategies of 1991). When acquired from the market, core more successful ones(Demsetz, 1973). Despite resource endowments fully captialize their rents these differences, the literature in industrial in the market price(Barney, 1986). Similarly, organization treats the industry as the unit of core strategies are characterized by lock-in, lock that firms with are homogeneous. imply unique decision-making conditions due to complexity, uncertainty, and conflict(Amit and Schoemaker, 1993 ). RELATIVE EFFECTS ON CORE These unique strategies and resources, in con STRATEGIES AND PERFORMANCE junction with causal ambiguity, create isolating mechanisms that protect the competitive positions lopment of new ones to 1982: Reed and DeFillipi, 1990). This heterogen- O 1998 John Wiley Sons, Ltd. Srat.MgmJ.vol.19,2-219(1998)
Firm and Industry Effects within Strategic Management 213 eity in turn leads to systematic differences in firm (Andrews, 1971; Ansoff, 1965), based on the performance within the same industry. Hence: industrial organization paradigm, are consistent with the structural determinants of competition Hypothesis 1: Core strategies and perform- discussed above. According to this perspective, ance within industries vary systematically with companies must develop strengths based on Key differences in firm-level characteristics Success Factors (KsF)that are stable and exter nally determined by the industry environment Industry-level drivers (Vasconcellos and Hambrick, 1989). Thi approach implies that firms in an industry con- Industrial organization researchers have argued verge towards competitive parity, thus enhancing that strategy and performance are primarily deter- their chances of survival( Barney, 1991) mined by the membership of an industry, and are When there is no clear understanding of the sustained through entry barriers. In this perspec- means-end relationship, firms should imitate the tive, the common structural elements of an indus- more observable aspects of successful strategies ry lead its members to share competitive charac- Managers pursuing the Ksf approach practice teristics. In a more dynamic context, as successful strategic benchmarking aimed at decreasing firms develop resources producing competitive petitive gaps(Colmen, 1993; Bogan and English dvantage, other firms are able to reduce competi- 1994). The practitioners collect competitive infor tive gaps by imitating these valuable resources. mation for imitation from different sources such As a result, convergent patterns of competition as reverse engineering, patent applications, indus- can become common industry characteristics try journals and magazines, financial statements, over time consultants, and ex-employees (Winter, 1987) Previous research has studied these convergent The industrial organization literature prescribes patterns for core strategies in technological and this approach marketing differentiation. For instance, in tech- Thus, shared industry characteristics such as nology development, firms share several charac- market structure and imitation of strategies lead teristics of the industry: direct competitors face to convergence of core strategies and performance similar technological opportunities for innovation among firms in the same industry and differences (Klevorich et aL., 1995: Cohen and Klepper, across industries. Therefore 1992), use a common protection mechanism for profiting from their technological investments Hypothesis 2: Core strategies and perform (Levin et aL., 1987),and share innovative ance vary systematically with differences in ditions derived from the underlying technolog life cycle(Utterback and Abernathy, 1975).L industry-level characteristics The behavioral explanation for homogeneity of strategies is more obvious for marketing expendi- COMPLEMENTARITY OF THE tures. They are easily observable and imitable- SCHOOLS ompetitors expenditures can be easily dupli cated Marketing expenditures may reach compa- This study argues that the above two hypotheses rable levels among competitors in an industry underlying resource-based view and the industrial because of similar conditions which determine organization schools within strategic management product differentiability Comanor and wilson, are complementary. Industry-level drivers that 1974), buyer characteristics(consumer or indus- promote homogeneity coexist with firm-level dri trial products ), stage in product life cycle, or vers that generate heterogeneity, just as various close rivalry(Kotler, 1994). Firms use advertising forms of competition coexist within the same to inform individuals about the quality of their industry. Firms invest upfront in resources that brand is better than those offered by rivals. In However, as industries evolve, imitation reduces such cases, advertising rather than price can the gaps and differences in resources between become the way in which competitors interact firms(Demsetz, 1973). The common nature of with each other (Scherer and Ross, 1990) customers,suppliers, products, technologies, and Prescriptions from early strategy literature competitive conditions leads to similarities with G 1998 John Wiley Sons, Ltd. sra:.Mgm.J,vol.19.2l-219(1998)
214 A.J. Mauri and M. p. Michaels an industry (Barney, 1991). While industrial we design and carry out an empirical test which organization has been primarily concerned with examines this complementarity the similarities among firms, the resource-based view has focused on the differences as the basis to develop sustainable competitive advantage METHODOLOGY (Wernerfelt, 1995 However,empirical studies within industrial Statistical test and measures organization and resource-based view have not The empirical analysis was conducted using the addressed this complementarity. This has been variance components methodology. Unlike partially because of the difficulty in operationaliz. regression techniques using fixed-effects models, ing the theoretical constructs. Researchers within variance components assume a random model industrial organization have relied on proxies of that does not require direct measurement of the structure such as entry barriers, concen- independent variables. Using variance compo- ratios, and industry dummy variables to nents, the unique firm characteristics are modeled strategy and performance. They have as latent factors, captured using individual latent reported a significant effect on r&d and advertis- variables for each firm; while industry attributes ing intensities, as well as performance(see are captured using a common latent variabl Scherer and Ross, 1990, Chs. ll, 16, and 17 for shared by members of the same industry. By a review ) On the other hand, several resource- assuming that the latent factors are selected ran- based studies (Jacobson, 1988; Hansen and Wer- domly from a population of firms and industries, nerfelt, 1989: Powell, 1996) have reported evi- variance components are capable of estimating dence supporting the influence of firm factors on the portion of the total variance derived from performance outcomes despite the difficulties in firm- and industry-specific sources. As rec measuring unobservable firm-specific character- ommended by Searle, Casella and McCulloch istics( Godfrey and Hill, 1995). (1992), the variance component tests were est Even those studies that used more sophisticated mated using the maximum-likelihood method techniques to overcome the measurement prob- The dependent variables for core strategies lems of industry structure and firm-specific were developed for technology and marketing characteristics reported findings that confirmed resources. Several researchers have suggested that he polar perspectives. Both Schmalensee(1985) these intangible resources are a potential source and Rumelt (1991) used variance component of competitive advantage. Dierickx and Cool analysis to study differences in performance (1989) argue that the accumulation process for derived from industry and firm effects. However, generating brand loyalty and technological exper their results are in confict due to methodological tise provides uniqueness and reduces imitation differences. Schmalensee found dominance of because of resource mass efficiencies, resource industry effects as he selected latent variables to erosion, resource interrelationships, time capture industry effects and market share for firm- compression diseconomies and causal ambiguity. level effects; Rumelt found dominance of firm R&d expenditure captures an enterprises endow effects because latent variables were used to cap- ment of unique knowledge possessed by individ ture both the industry and firm-specific effects. uals and teams within organizations( Caves, 1982 In addition, Hill and Deeds(1996)argue that the MacDonald, 1985), and these investments require 3-year time series used by Rumelt is too short periods from 4 to 6 years to provide a return to allow equilibrium to be reached, and Powell ( Cohen and Levin, 1989). Similarly, advertising (1996)questions the validity of the FtC data expenditure captures a firms intangible assets base used. The above discussion brings out the such as brand name and reputation (Stewart, need for more empirical research to test the com- Harris, and Carleton, 1984 ). Because of the high plementarity between the industrial organization uncertainty, high asset specificity and high sunk and resource-based view. In the following section costs associated with R&D and advertising, these expenditures are core strategies financed with equity (Balakrishnan and Fox, 1993), or with 如m时 mo chaure mr galrdgts the mueller9. d r&d and advertisin e 1998 John wiley Sons, Ltd. Strat. Mgm.J,vol.19.211-219(199