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 ex...

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Bibliographic Details
Published in:Strategic management journal 1997-11, Vol.18 (10), p.825-835
Main Authors: Brush, Thomas H., Bromiley, Philip
Format: Article
Language:English
Subjects:
Applied sciences
business effects
Business strategies
Business structures
corporate effects
Corporate income
Corporate profits
Corporate strategies
corporate strategy
Corporate synergy
Corporations
diversification
Economic performance
Economic theory
Estimates
Exact sciences and technology
Firm modelling
Industrial economics
Industrial market
Influence
Market shares
Modeling
Monte Carlo simulation
Operational research and scientific management
Operational research. Management science
Quantitative genetics
Statistical variance
Strategic planning
Studies
Variance
variance components
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Summary: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.
ISSN:0143-2095
1097-0266
DOI:10.1002/(SICI)1097-0266(199711)18:10<825::AID-SMJ933>3.0.CO;2-Y