Empirical test of a model of individual firm economic profitability and the impact of strategic group membership
Roquebert, Jaime A.
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Researchers investigating the causes of individual firm (or strategic business unit, SBU) economic profitability have not reached a consensus as to what these causes are, in part due to the wide variety of disciplines and orientations represented. In an attempt to solve the confusion, some have tried to aggregate the different causes into their sources of origin—industry, corporate parent, or firm specific—and, using variance components models, have estimated their relative significance. However, different conclusions have been reached, even when using the same database. Also, one concept missing in previous studies is the strategic group, an empirically valid concept in the literature. This study addressed the issue of relative importance of industry, corporate, firm, and strategic group effects using variance components estimation with a recent database, the Compustat Business Information Industry Segment tapes. In contrast to previous papers, this study finds significant corporate effects, but decreasing exponentially as the average number of SBU's per corporation increases. As in previous research, firm effects account for most of the variance, industry effects are moderate, while strategic group effects appear non-significant. This study gives some support to both the management choice and industry structure perspectives of the strategy literature, and point to future research into the sources of economic profitability.