Evaluating a Firm's External Environment - Illinois State University

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Chapter 2: Evaluating a Firm’s External Environment 49
For some time now, scholars have
been interested in the relative
impact of the attributes of the industry
within which a firm operates and the
attributes of the firm itself on its performance.
The first work in this area
was published by Richard Schmalansee.
Using a single year’s worth of data,
Schmalansee estimated the variance in
the performance of firms that was
attributable to the industries within
which firms operated versus other
sources of performance variance.
Schmalansee’s conclusion was that
approximately 20 percent of the variance
in firm performance was explained
by the industry within which a firm
operated—a conclusion consistent with
the S-C-P model and its emphasis on
industry as a primary determinant of a
firm’s performance.
Richard Rumelt identified some
weaknesses in Schmalansee’s research.
Most important of these was that
Schmalansee had only one year’s
worth of data with which to examine
the effects of industry and firm attributes
on firm performance. Rumelt was
able to use four years’ worth of data,
which allowed him to distinguish
between stable and transient industry
and firm effects on firm performance.
Research Made Relevant
The Impact of Industry and Firm
Characteristics on Firm
Performance
Rumelt’s results were consistent with
Schmalansee’s in one sense: Rumelt
also found that about 16 percent of the
variance in firm performance was due
to industry effects, versus Schmalansee’s
20 percent. However, only about half
of this industry effect was stable. The
rest represented year-to-year fluctuations
in the business conditions in an
industry. This result is broadly inconsistent
with the S-C-P model.
Rumelt also examined the impact
of firm attributes on firm performance
and found that over 80 percent of the
variance in firm performance was due
to these firm attributes, but that over
half of this 80 percent (46.38 percent)
was due to stable firm effects. The
importance of stable firm differences in
explaining differences in firm performance
is also inconsistent with the S-C-P
framework. These results are consistent
with another model of firm performance
called the Resource-Based View,
which will be described in Chapter 3.
Since Rumelt’s research, efforts
to identify the factors that explain variance
in firm performance have accelerated.
At least nine articles addressing
this issue have been published in the
literature. One of the most recent of
these suggests that, while the impact
of the industry, the corporation, and
the business on business unit performance
can vary across industries and
across corporations, overall, business
unit effects are larger than either corporate
or industry effects.
Sources: R. P. Rumelt (1991). “How much does
industry matter?” Strategic Management Journal,
12, pp. 167–185; R. Schmalansee (1985). “Do markets
differ much?” American Economic Review,
75, pp. 341–351; V. F. Misangyi, H. Elms,
T. Greckhamer, and J. A. Lepine (2006). “A new
perspective on a fundamental debate: A multilevel
approach to industry, corporate, and business
unit effects.” Strategic Management Journal,
27(6), pp. 571–590.
competitors. However, DirecTV and television production companies are complementors
to each other. In deciding whether to encourage the entry of new complementors,
a firm has to weigh the extra value these new complementors will create
against the competitive impact of this entry on a firm’s current complementors.
It is also the case that a single firm can be both a competitor and a complementor
to the same firm. This is very common in industries where it is important
to create technological standards. Without standards for, say, the size of a CD, how
information on a CD will be stored, how this information will be read, and so
forth, consumers will often be unwilling to purchase a CD player. With standards
in place, however, sales of a particular technology can soar. To develop technology
standards, firms must be willing to cooperate. This cooperation means that, with
respect to the technology standard, these firms are complementors. And indeed,