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What is the Meaning of Corporate Effect? • Authors analyze, reinterpret, and retest Rumelt’s essay • Rumelt’s argument • Argument’s Implication • Brush and Bromiley’s point of view • He did not interpret statistical metrics well enough • What he found was not as telling as he believed • Authors construct simulation
Rumelt’s Results • Caused stir, provoked rebuttal • Rumelt’s finding • 46 percent of variance explained by business unit effects • 8 percent by industry effects • 1 percent by corporate effects. • Rumelt’s claim • firms do not have ability to transfer success between product lines • firms have few resources (in the RBV view) which can be applied internally to help them survive
Authors’ Counter Arguments • Counter argument: What results appeared to say was not what they meant • Tact to establish rebuttals • Construct a Simulation • Test for two questions • how does the size of the corporate effect pan out in the variance component? • what might happen to the variance component if we don’t assume homogeneous corporate effects over business units?
Authors’ Findings • When scale is 1: similar variance component measures • When scale is .6: the variance component under represents this at .38 • When the scale is .2: the component variance is essentially zero at .03. • A scale of .20: relevant importance of the corporation is 20 percent • Conclusion: • Variance component magnitudes do not reflect importance in a linear manner • Variance components appear to be the square of importance. • Size of industry variance components is 1/6 size of the business unit variance does not imply that the importance of the first is 1/6th the importance of the second. • The results vary significantly over simulations. • Rumelt’s findings should be interpreted to mean: • corporate effect is not overwhelming • corporate effect is smaller than business unit effect (but not unimportant).
Final Words • Authors critique methods of a past scholar, whom they respect. • I question the use of “scale” as measures • I admire the care and rigor of the authors • Whether right or wrong, I would love to see Rumelt’s response • Liven the debate in strategy and challenge an erroneous study • Field would benefit from this challenging of theories in order to synthesis and test results.
