1a) Strategy - Early History & Firm-Industry debate Flashcards
Schmalensee (1985)
PURPOSE: atheoretical approach to empirically disentangle the effects of firms vs industries on performance (- a novel approach in the S-C-P stream of research)
METHOD: Sophisticated method for its time (using FTC Line of Business Data)
CONCLUSION: Firm effects are not a strong driver of performance in the model (did not exist).
- Rather, industry factors accounted for a good portion of the variance in industry returns. (20%)
Limitation: The study only looked at 1 year of data
Rumelt (1991)
PURPOSE: Refute Schmalensee (1985) & Porter.
METHOD: Reanalyse Schmalensee’s data and build upon his method but include more years in the analysis.
CONCLUSION: Industry/Corporate level have an effect but it is actually quite small. Rather, the primary driver of performance is Business-Units (46%).
Limitation: The data only looks at the manufacturing sector.
Impact: Becomes foundational in RBV camp (perhaps mis-interpreted (according to Porter)).
McGahan & Porter (1997)
PURPOSE: Refute Rumelt ‘91
METHOD: Use compustat (across sectors), over 72,000 observations. They allow for serial correlation of errors (removes year interdepedence, a problem with Rumelt’s study).
CONCLUSION: Empirical results have “strong support that Industry really matters”
- Manufacturing segment is an outlier (in other words they “call into question” Rumelt’s study as not generalizable).
Limitation: SIC codes, did not analyze the finance industry.
Porter (1979;1980)
‘79-HBR / ‘80- Competitive Strategy Book
- The essence of strategy is competition, but competition is viewed too narrowly by most managers.
- Makes readers question, is this book really “35 years old” as it eloquently explains complex ideas into two foundational frameworks which later become foundational to the field of strategy, (1) Generic Strategies, specifically he lays out that firms can compete under cost leadership, differentiation, and niche(focus) strategies. (2) He introduces the five forces analysis (suppliers, buyers, new entrants, substitutes, competition).
- “sustained superiority may reflect monopoly rents arising from favorable industry structures”– The forces determine the profitability of an industry.
CRITICISM: is lack of empiricism (based mainly on illustrative case studies). —> cue Schmalensee (1985)
other points:
- Voted the ninth most influential management book of the 20th century.
Name the order of foundational studies in strategy (early history).
Andrews (1971) - SWOT
BCG (1975) -BCG Matrix(CashCow, Dog, Rising Star, Q-mark)
Porter (1979:1980)- 2 theories
Schmalensee (1985)-Emperical support
Rumelt (1991)-CounterAttack
McGahan & Porter (1997)-PorterStrikesBack
Misangyi (2006)-NewMethods (HLM > Variance Decomp)
Short (2009) - New Ventures enter the debate
Henderson (2012) - Random Effects (Markov Chains)
Short et al (2013) - New Variable (Industry Life Cycle).
Henderson et al. (2012)
PURPOSE: SMJ article looks to question the mass of practitioner books on Good To Great, etc. by undertaking an empirical analysis of the research question: HOW LONG MUST A FIRM BE GREAT TO RULE OUT CHANCE?
- BENCHMARKING SUSTAINED SUPERIOR
PERFORMANCE WITHOUT BEING FOOLED BY
RANDOMNESS
METHOD: try to ensure that rule out false positives that the “good to great” type of analysis is likely to produce.
Using simulations and comparing them with compustat benchmarking data they statistically assess how often a firm must perform well, on an annual basis, across the firm’s observed life to be confident that its track record is not a false positive.
CONCLUSION: The number of Superior performers in compustat data is in fact greater than the number that would be randomly generated false positives (that’s really all this study can conclude). The identification of sustained superior performers requires particularly stringent benchmarks to enable valid study
Short, et al. (2013). -Karniouchina (first author)
PURPOSE: Extend the firm vs. industry debate to determine if industry life cycle stage matters. Contributes by introducing a new variable (industry life stage; growth, maturity, and decline) to the performance debate of business-unit, corporate parent, and industry.
METHOD: longitudinal data from 1,957 firms in 49 industries to examine the relative importance of Life Cycle Stage of Industry on Performance.
CONCLUSION: . Industry effects have a negligible role in nascent/growth industries (*Very important implication).
Overtime- Corporate-parent & industry effects ↑ as industries move through the life cycle, while business-unit effects ↓
Pre-Porter
- 60s and 70s- Big Bang, Strategy starts to develop as a field. Early fundamental framework is the SWOT (Andrews, 1971)
- 1975 -First attack on the SWOT – the concept of the Learning Curve (Boston Consulting Group, 1975). This curve shows that costs decrease by a constant (k) percentage as volume increases in each industry. oBCG matrix (star, cash cow, dog)
Short et al. (2009)
PURPOSE: extend the long-running debate (firm/industry) into the domain of entrepreneurship
METHOD: examine firm and industry effects on the performance of new ventures.
CONCLUSION: Industry does not ‘matters’ for the survival new ventures (in the sample).
-New venture funding is related to both sales and survival.
Misangyi et al (2006)
- Firm-Industry (early methods have now been replaced with new method)
- Early methods: Schmalensee/Rumelt used Variance decomposition to analyse the data.
- New methods: HLM.
- The nesting of data is one of the advantages of HLM, because it accounts for the independence of errors assumption that may be violated when using other techniques, such as OLS regression.
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Wiggins (2005)
Purpose: The concept of Hypercompetition. Drawing on Schumpeter’s ghost (Schumpeterian Rents, Need to Innovate to create rents).
Methods: Event History Analysis to compare superior performing firms from recent periods with periods from the 70s (rolling 5 year windows) Conclusion: Over time, C.A has become increasingly harder to sustain.
