Drnevich & Shanley 2005a.doc

Page 1 of 26

Multi-Level Issues for Strategic Management Research:

Implications for Creating Value and Competitive Advantage

Paul L. Drnevich Krannert School of Management, Purdue University 403 W. State Street, West Lafayette, IN 47907 USA Phone: (765) 430-6900 / E-mail: dren@purdue.edu

Mark T. Shanley College of Business Administration, University of Illinois at Chicago

601 South Morgan Street – Room 2214, Chicago IL, 60607 Phone: (312) 996-6229 / Email: mshanley@uic.edu

ABSTRACT Most research issues in strategic management are essentially problem focused. To one extent or

another, these problems often span levels of analysis, may align with different performance metrics, and likely hold different implications from various theoretical perspectives. Despite these variations, research has generally approached questions by taking a single perspective or by contrasting one perspective with a single alternative rather than exploring integrative implications. As such, very few efforts have sought to consider the performance implications of using combined, integrated, or multi-level perspectives. Given this reality, what actually constitutes “good” performance, how performance is effectively measured, and how performance measures align with different perspectives remain thorny problems in strategic management research. This paper discusses potential extensions by which strategic management research and theory might begin to address these conflicts. We first consider the multi-level nature of strategic management phenomena, focusing in particular on competitive advantage and value creation as core concepts. We next present three approaches in which strategic management theories tend to link levels of analysis (transaction, management, and atmosphere). We then examine the implications arising from these multi-level approaches and conclude with suggestions for future research. CITATION: Drnevich, P.L. and Shanley, M. (2005). Multi-Level Issues for Strategic Management Research: Implications for Creating Value and Competitive Advantage, in Dansereau, F. and Yammarino, F.J. (eds.) Multi-level Issues in Strategy and Methods, vol.4. Oxford, UK: Elsevier Academic Publishers. pp 117-161.

Drnevich & Shanley 2005a.doc

Page 2 of 26

INTRODUCTION Most research topics within strategic management span multiple levels of analysis. For example,

the importance of the interactions of individual firms within broader collectives such as strategic groups, industries, and sectors is a fundamental perspective of most lines of strategy “content” research and is inherently multi-level. Such research is not totally focused on either the firm or its context, but rather focuses on the firm’s behavior in its context. Other lines of strategy research move from the firm level to more “micro” perspectives. For example, top management teams have been a staple of “strategy process research” that involves individuals (executives), groups of individuals (top management teams) whose interactions can be characterized and tracked, and the even broader collective of formal relations (networks) in which a firm and its members are embedded. Process research, however, does not just link micro and macro firm-level perspectives, but also can include the role of the firm in its broader environmental context. For example, executives work not only within a team and their firm, but also within a network of their counterparts at other firms. As a consequence, levels of analysis in research on boards of directors could potentially range from that of the individual director to extended interfirm networks, institutional leadership, and business–government relations. Clearly, it is indeed difficult to name a topic in strategic management that does not cross multiple levels to some degree. The implications of spanning of levels are therefore fundamental to the field, its research agendas, and its theoretical insights.

Whereas strategy topics span levels of analysis, academic studies of strategy (and of strategic managers) often consider only one or two levels, while controlling for other levels involved in the topic of interest. This approach may be a reasonable intellectual division of labor, as both research time and attention are limited. Furthermore, multi-level issues are “messy” and therefore difficult to research well in a rigorous manner. Nevertheless, such practice may result in positions that devalue the multi-level aspects of a situation and thus control for the very features that are most interesting about a firm’s strategic decisions.

Studies of general managers and strategic decision processes must focus on the perceptions of a small number of top respondents, either single key informants or top management team members. These studies must then move from largely individual-level data and results in an attempt to reach broader multi-level conclusions. The data requirements of such studies limit the number of firms that can be sampled, the type of data obtainable from such samples, and the ability of researchers to employ longitudinal designs (Miller, Burke & Glick, 1998). As an alternative to field studies, strategic process studies may employ experimental or quasi-experimental designs that control for multi-level influences and abstract away from actual firm settings (Sutcliffe & Zaheer, 1998). However, these types of designs permit broader generalizations only to the extent that they are reflective of conditions in real firms. An extreme example of such levels problems arises in studies of top managers, whose individual behaviors and even cognitions are taken as critical inputs to dynamics that affect entire firms and resonate into the broader business environments faced by firms (Hayward, Rindova & Pollock, 2004).

These types of issues arise in different ways in other areas such as sociological research. Population ecologists, for example, have focused on broad environmental views of populations and industry sectors to highlight the limited possibilities for successful adaptation and change by firms. This work emphasizes inertial properties and tendencies toward convergence that large populations of firms demonstrate and thus downplays the potential for strategic action (Hannan & Freeman, 1980; Carroll & Hannan, 2000). Similar views on the constraining power of environmental forces have been used by institutional theorists, who have emphasized the power of coercive, normative, and cultural systems on organizations. This emphasis has generally been tempered to recognize the potential for significant action by individual organizations (Scott, 2001, pp. 193–200). In addition, levels of analysis issues have arisen more explicitly in research on the embedded nature of strategic action (Granovetter, 1985; Emirbayer & Goodwin, 1994; Baum & Dutton, 1996).

Somewhat similarly, economic studies of industries and markets have often deemphasized the role of strategy in specific situations, instead focusing on the importance of regulation, industry structure, or market dynamics in the determination of prices and output levels. This approach is also problematic: While markets and industries can place constraints on firms, it is doubtful that the activities and decision making of large firms will be rendered unimportant by such constraints. Nevertheless, economists have made some limited attempts over the years to examine the fluid boundaries between firms and markets in an effort to theorize about firm decision making (Coase, 1937; Penrose, 1959; Cyert & March, 1963;

Drnevich & Shanley 2005a.doc

Page 3 of 26

Richardson, 1972; Williamson, 1975). Yet, only recently has the idea of “management strategy” come into its own and begun to gain some legitimacy as a distinct area of study within economics (Milgrom & Roberts, 1988; Spulber, 1994, 2003). Thus, while the challenges posed by multi-level phenomena predate the study of strategy, the issues illustrated in related fields remain only partially addressed and warrant more consideration in strategic management research.

Understanding the implications of multi-level phenomena on strategic management research does not just mean noting the relevance of multiple levels or assessing which level is most appropriate, but also involves theorizing about how levels interact and developing theoretical mechanisms to reflect those interactions. If strategy research is to effectively link organizational and environmental levels, then theory development should be driven in part by efforts to clarify the nature of these interactions across levels. This endeavor involves a variety of questions related to the role of firm resources, capabilities, and managerial choice and action in relation to environmental and industry contexts (Table 1 gives some examples of potential questions).

Table 1. Key Questions for Multi-Level Theory Development.

1) How much influence does environmental context have on a firm’s performance? 2) How much influence does Industry have on a firm’s performance? 3) How much influence do resources have on a firm’s performance? 4) How do managers translate a firm’s resources into capabilities for sustained

performance? 5) How influential are the strategic choices of top managers at different levels? Unfortunately, strategic management research tends to focus on these questions individually, or

on positioning one question against another as alternatives, rather than on exploring their interaction. As such, theory development in strategy all too often appears driven by disagreements regarding the multi-level nature of these issues rather than by their integration of different levels (Short, Palmer & Ketchen, 2003; Madhok, 2002; Silverman, 1999).

In this chapter, we discuss the problem-focused, multi-level nature of strategic management as well as implications for researchers stemming from these issues. We argue that this crossing of levels of analysis is fundamental to the field of strategy and especially to ideas of complexity, commitment, and sustainability. To illustrate this idea, we first explore two concepts central to strategic management: competitive advantage and value creation. Next, to consider explicitly how strategic management theories address multi-level issues, we discuss the relative strengths and weaknesses of three mechanisms that strategic management theories have used to implicitly address multi-level issues: transactional linkages, linkage through managerial roles, and linkage by atmosphere. We then suggest some theoretical implications for problem-focused multi-level work and conclude with suggestions for future research.

THE MULTI-LEVEL, PROBLEM-FOCUSED NATURE OF STRATEGY

History and Background of the Topic and Issue The multi-level, problem-focused nature of strategy predates the growth of industrial

organizations. Indeed, the origins of the concept of strategy in political and military contexts date back to the works of Sun Tzu around 400 B.C., if not earlier. Since then, military and political applications of strategy have evolved and expanded beyond traditional ideas of tactics, especially in such areas as planning, resource positioning, maneuver, and operations. While military and political applications differ significantly from their counterparts in economic settings, the focus for the concept has been on helping the decision maker—whether a commander, prince, or manager—to make consequential decisions. In military applications, the concept of strategy has evolved to span multiple levels of analysis, including environmental, technological, and political components, as conditions have changed. As such, crafting strategy has involved focusing on objectives and problems from multiple levels simultaneously where the measures of success are also aligned by level. Considerations here include national and multinational resources and capabilities, which determine both strategic options and tactical capabilities of the nation-state. Similarly, changes in technology force nations to periodically reexamine their strategies and tactics as well as the changing information needs of their military units (Keegan, 2003).

Drnevich & Shanley 2005a.doc

Page 4 of 26

While the application of strategic concepts to economic contexts has been motivated by the problems faced by large firms, the field has also developed around the efforts of various communities of scholars. Ideas contributing to strategy have originated in multiple academic disciplines, each with its own focus of attention. This multidisciplinary basis of academic strategy has contributed to the multi-level nature of the resulting body of knowledge. The applied problem-focused basis of strategic thinking, coupled with its location in multiple but overlapping academic disciplines, guarantees that explanations in strategic management will span levels of analysis and be “messy.” For example, economists have sought to better explain these difficulties with traditional industry and market models and to develop new approaches for modeling firm behavior. Sociologists, by contrast, have attempted to explain the behavior of the large public and private organizations that emerged in the twentieth century. This effort spawned the study of bureaucracy and organization theory, as well as the study of the behaviors of large groups of organizations over time, and the ways in which the environments of organizations are themselves organized. Psychologists have displayed more interest in “micro” behavioral topics, such as how individuals and small groups make decisions, interact with one another, and generally behave in organizational contexts. This diverse theoretical background contributes to the multi-level, problem-focused nature of strategy and has implications for strategy research.

The Multi-Level, Problem-Focused Nature of Strategy Research Topics

Why do strategic management topics span multiple levels of analysis? This is an intriguing aspect of the field, specifically because it works against our inherent desire for elegant modeling and focused research designs. It also limits a researcher’s ability to articulate clear and powerful recommendations and works against the ready accumulation of research findings within an academic community. The answer to this question appears to lie in the nature of the problems that strategy researchers study. “Strategic” topics tend to be problem-focused and complex (see Table 2). The problems that prompted the growth of studies in the field of strategy were those related to the growth of large firms in modern economies (Chandler, 1977). Even though there is continuing interest in new ventures and small entrepreneurial firms, contemporary strategy research remains strongly oriented toward larger firms, for reasons of both theoretical interest and research practice (consider the large number of research studies relying on databases such as CRSP and COMPUSTAT, whose samples comprise large public companies with extensive reporting obligations). Table 2. The Multi-Level, Problem-Focused Nature of Strategy Research.

“Strategic” research topics tend to be problem-focused and complex Most of the issues facing large firms are inherently multi-level Firm capabilities developed for scanning and acting in these broader environments Multi-level sets of issues are the normal expectation rather than the exception “Strategic” research topics naturally span multiple levels of analysis How does the problem-focused nature of strategy research topics relate to their spanning multiple

levels of analysis? In fact, it has quite a bit to do with it, as most of the issues facing large firms are inherently multi-level. Initially, these firms had grown larger than most other firms, often by a wide margin. To accomplish such growth, a number of problems had to be solved that greatly complicated the ways in which firms needed to be considered and their actions evaluated. First, for such growth to be profitable, it needed to be accompanied by an internal division of labor and task specialization and a managerial hierarchy that, along with size, allowed economies of scale and scope to be realized. Second, these growing firms began consolidating their markets into oligopolies that permitted surviving members to establish sustainable strategies, experiment with collective action, and reap the benefits of scale relative to the size of the market. The industries in which these firms developed have often possessed important scientific and technological aspects that forced firms to make substantial investments in R&D capabilities that supported existing products, developed new ones, and kept managers abreast of changes in the technological environment that might affect the firm. Finally, the growth and internal differentiation of these firms posed a new range of problems for firms regarding how best to relate to those actors in the larger environment who were affected by these changes, such as workers, local governments, and

Drnevich & Shanley 2005a.doc

Page 5 of 26

competitors. Firms needed to develop capabilities for scanning and acting in their broader environments, whether by lobbying, negotiating with unions, or complying with government regulations.

Some firms, such as General Electric, have faced this array of problems from their very inception (Chandler, 2001); for most others, such challenges have evolved as firms have grown. As managers developed the capabilities of their firms and coordinated them, so that their responses to markets and competitors were coordinated with their internal workforce needs and productive assets, they found that their solutions committed their firms to a set of strategic choices that could be difficult to change if conditions in the business environment did not turn out as planned. If these managers’ decisions were effective, however, this inertial multi-level commitment made it difficult for their rivals to imitate them.

For today’s mid-size and large firms, this multi-level set of issues is the normal expectation rather than the exception. A problem focus on strategic issues also ensures that the importance of different cross-level issues will change over time. As the problems facing the firm change, the firm’s “strategy” must change as well. Furthermore, the scientific knowledge and technologies underlying industries and sectors will change, sometimes gradually and sometimes sharply. Some firms will dominate their industries for a time, whereas others will decline, exit, be acquired, or perish. Industries will expand, mature, and then change as related industries develop and whole sectors shift. Political climates and regulatory regimes will also change, as evidenced through whole professions—such as those for regulatory affairs—that have developed as the need for firms to interact with their broader environment grows. Furthermore, technological contextual changes, such as the rise of the Internet, have increasingly enabled smaller firms to make management choices regarding environmental linkages formerly available only to larger firms (as an example, consider the growth of such intermediaries as Verticalnet.net, which facilitate buyer–supplier coordination in a range of industries and sectors). How firms align with their environments will likely require continual reexamination and adjustment over time as the environmental context changes.

Multi-Level Implications for Performance Measurement

Given the multi-level, problem-focused nature of strategic management, there has been a natural interest in whether the problems of interest to the field are solved by firms and their management. This type of inquiry has led to an emphasis on firm performance and its measurement. This perspective has, in turn, raised further questions for research scholars in regard to what actually constitutes good performance and how, where, and when to measure it in a manner to support strategy research (see Table 3).

Table 3. Multi-Level Implications and Questions for Performance Measurement.

1) At which levels of analysis and time periods should performance be assessed? 2) How do the specific actions of subunits contribute to overall firm performance? 3) How should we evaluate and reward managers? 4) What actually constitutes performance? 5) What dimensions does performance include? 6) What is good performance? 7) What standards should we use to judge performance and draw comparisons across firms? The types of performance measurement questions listed in Table 3 have taken strategy scholars

into “troubled waters” from which we have yet to emerge as a field. A solution is needed to allow scholars to deal with the implications of performance and to enable them to address these types of performance measurement questions. The real question is how strategic management research should deal with these issues of performance measurement.

Any detailed consideration of performance should include the overall results of the firm, its relative performance vis-à-vis its competitors, and the performance of the firm’s various subunits. Of course, looking at these results together raises further levels of analysis issues. For example, is the combination of good subunit performance and lackluster corporate results, as reflected in the share price, an indicator of poor corporate management and an invitation to takeover? Or is it an indication of industry or sector dynamics that affect competitors as well? Current performance measurement methods make it difficult for one to distinguish between these possible alternative situations, which poses a problem for both scholars and practitioners.

Drnevich & Shanley 2005a.doc

Page 6 of 26

Even when a firm’s performance measures are understandable, the overall goals of the firm, against which performance is measured, are predicated on assumptions about technologies, products, markets, and the nature of consumer demand, all of which are continually evolving. Therefore, assessing the performance of a single firm in such a context requires viewing it as a part of a larger dynamic whole as well as the sum of its constituent subunits. For example, corporate strategy decisions regarding mergers, executive compensation, or international expansion have sparked public policy debates on appropriate corporate structure and conduct within the broader social environment. While several studies in strategic management have examined multi-level determinants of performance, including industry, organizational scope and diversification, and firm-level differences, little progress has been made toward developing a combined multi-level set of measures (Seth & Thomas, 1994; Kogut, 2000). Thus, strategic management remains rich with evolving, competing, and overlapping perspectives, each attempting to explain elements of the problem-action-performance questions of the field. To illustrate the implications of adopting multi-level perspectives, the next section explores the inherent multi-level nature of two concepts central to research in strategic management: creating value and sustaining competitive advantage.

STRATEGY’S INHERENTLY MULTI-LEVEL CORE CONCEPTS: COMPETITIVE ADVANTAGE AND VALUE CREATION

The Multi-Level Nature of Competitive Advantage

Perhaps the most commonly accepted core concept among strategic management research perspectives is that of competitive advantage. When a firm (or business unit within a multibusiness firm) persistently earns more profit than the other firms with which it competes, the firm is viewed as having a competitive advantage in that market. Even such a basic definition as this suggests an inherent spanning of levels of analysis, because a firm’s profitability within a particular market depends on (1) market-level economics, (2) the abilities of individual firms to generate revenues to cover their costs, and (3) the relative skills of firms to do this more effectively than their competitors.

Understanding competitive advantage here requires a careful analysis of a firm’s production efficiencies, R&D investments, and marketing skills. We would certainly expect that a firm that was “trying hard” to succeed in the marketplace would be investing in its resources and capabilities and attempting to use them as effectively as was possible. Of course, without resources and capabilities, it is unlikely that any firm will succeed. Resources and capabilities, however, are not logical requirements for success (perhaps necessary prerequisites, but not sufficient by themselves). Furthermore, whether the mere existence of resources and capabilities in a firm leads to actual advantage will depend on what the firm’s competitors are doing and what the firm’s consumers value (Powell, 2001). Unless these three aspects of advantage (firm, competitors, and consumers) are defined tautologically, such that superior resources and capabilities are defined by relative profitability or that success with consumers equals marketing capability, then advantage must be seen as inherently multi-level and relational. Research relying on ideas of competitive advantage should therefore consider resource-, firm-, and industry-level implications. Table 4 provides an overview of the multiple levels of competitive advantage.

Table 4. The Multi-Level Nature of Competitive Advantage.

Firm resources and capabilities Firm strategy and managerial actions Competitor resources, capabilities, behavior, and actions Consumer demand and behaviors Industry/market macro-level structural and contextual characteristics Scholars have attempted to resolve some of these issues by studying the importance of firm- or

market-level effects in explaining profitability (Schmalensee, 1985; Rumelt, 1991; McGahan & Porter, 1997; Brush & Bromiley, 1997). These studies have arrived at varying estimates of the relative contributions of business units, corporate parents, industry, and broader macroeconomic conditions to firm profitability—results suggesting contributions to profitability from multiple levels, as well as a large degree of the unexplained variance. While there is some accepted support for industry and corporate

Drnevich & Shanley 2005a.doc

Page 7 of 26

influences, issues of how multiple levels interact to influence profitability are unresolved, a point to which we will return later in this chapter. First, however, we will examine other multi-level influences on competitive advantage, looking next at industry.

Industry analysis frameworks, such as Porter’s framework (1980), are based on the idea that industry conditions are important influences on firm profitability. This is undoubtedly correct to some degree—the average performance of firms in some industries is consistently higher than it is in other industries. In reality, knowing that “industry matters” in firm profitability tells us very little about how it matters or what firms should do in the face of industry effects. Even though it is fairly clear that knowing the industry in which a firm competes helps to explain its performance (Ruefli & Wiggins, 2003), few researchers agree on the size of this effect or would focus solely on the industry level of analysis in explaining firm performance. This is especially true where firm profitability varies both across and within industries over time, as is often the case. Also, because some firms consistently earn rates of return that exceed the average for their industries, this idea suggests that industry effects are not equally important for all competitors but may be most important for average or typical firms. Therefore a firm’s competitors, competitive positioning, and the competitive dynamics of an industry must be closely considered.

While a firm’s competitive advantage implies a favorable comparison with its competitors, it is a surprisingly open question just who those competitors happen to be. Specifically, should the identification of “competitors” be narrowly restricted, so that only a firm’s longstanding and direct rivals are considered? This practice would be consistent with the daily experience of firms, but could prove too narrow in periods of significant industry change. Firms with too narrow a view of their industries could be more likely to experience strategic “blind spots” (Zajac & Bazerman, 1991).

As an alternative to narrow, industry-specific definitions, competition could be more broadly defined to include general categories of firms, such as in broad industry codes. Doing so may well be more appropriate than relying on immediate competitors, and could make use of existing data sources and classifications. In addition, it may allow for the inclusion of firms with similar resource and/or capability bases, which may be potential competitors, yet operate outside of normal industry definitions. Of course, too broad a definition of competitors may go well beyond the underlying context in which the firm actually operates and lead to an underestimation of a firm’s potential for strategic action. Too broad a grouping will keep a researcher from identifying an existing firm-level influence on performance by masking a firm’s true advantage relative to its competitors. Further considerations may need to be explored to help appropriately define the range of a firm’s competitors. One such consideration may be geography.

Should competition be geographically delimited and, if so, what is the appropriate basis for identifying proximate competitors? Do all hospitals within a metropolitan area compete with one another on all products? Most likely they do not, although there may well be product overlap. What about the food stores in an area? Should a supermarket’s competitors be considered the hundreds of stores in the general metropolitan area or just the few stores in the immediate geographic area of a store (Phillips, 1960)? The view of competition and strategy that arises from such an analysis will certainly differ by how broadly or narrowly a firm’s comparison set is defined. The same point may also hold for corporate-level actors, in that diversified firms that compete in global markets may differ sharply in their strategic decisions from otherwise comparable firms that compete in primarily domestic markets (Murtha & Lenway, 1994).

As discussed earlier, strategic management research that considers multi-level perspectives will need to consider what constitutes “performance.” Historically, economic and strategic theories have tended to focus on costs when considering advantage. While “profit” in general is what remains after costs have been covered, the unambiguous identification of the components of profit—including direct and indirect costs, and various types of returns—has proven difficult. It has proved even more difficult to examine, across a large sample, why firms create their particular arrays of products and services and/or why consumers purchase those products and services. Specifically, just because a firm is efficient does not imply that its products will sell, or that they will sell at a price that justifies the firm’s investments in the means of production and distribution. Likewise, just because a firm develops new and improved products does not mean that these products will be valued by consumers. However, the types of value created by firms and the nature of demand facing firms have largely been treated as exogenous in strategy models. This practice, in turn, leads to the idea that firms need to be “lucky” in their initial product and service offerings and links the ability of the firm to strategize with this good fortune (Barney, 1986). This

Drnevich & Shanley 2005a.doc

Page 8 of 26

concept increases the difficulties in understanding competitive advantage as well as the related idea of value creation.

The Multi-level Nature of Value Creation

It is bordering on the commonplace to say that value-creating activities are important for firm success and survival. They are particularly critical in rapidly changing environments, fast-cycle markets, and hypercompetitive industries in which firms may be unable to sustain current competitive advantages. The process by which organizations identify activities that contribute to value creation in ongoing activities remains unclear. It is also not well understood by management scholars how new sources of value are created or how organizations balance current value-generating activities and new value-creation prospects.

The expression “value creation” is common in research on strategy, marketing, finance, and entrepreneurship. It is the business result that managers and entrepreneurs strive for and the standard by which business and venture performance is often assessed. Even with its popularity, however, what “value creation” actually means remains unclear. The basic intention in its use appears to be the positive function of firms in generating new products and services that prove attractive to consumers. This view is quite different from perspectives such as industry analysis that are interested in how firms “capture” the demand already existing in a situation, a description suggesting that value is merely redistributed rather than created. Alternatively, value creation can be analyzed as an overall performance result. In some studies, it refers to profits or the expectation of profits (as in “event” studies of stock price changes following some important event). In others, it concerns the amount of realized profit above “normal” market returns.

Value creation can also refer to the processes and activities that lead to a firm’s business results. This sense is used by Porter (1985) when discussing the “value chain” as the activities by which firms add value to their inputs before they are sold to buyers and end users. In more entrepreneurial settings, the sense of value creation refers to new occasions for value, new products, and services that prove useful to consumers and commercially viable to developers, whether entrepreneurs or internal venture managers.

Like the idea of competitive advantage, value creation forces a discussion of firm performance that is inherently multi-level (see Table 5). First, it considers firm results such that firms that perform well are seen as creating value. Second, considering how value is created highlights internal capabilities and resources, regardless of whether one is considering innovation or ongoing activities. Third, the concept of value creation brings in external constituencies to the firm; rather than competitors, the reference group for competitive advantage, the constituency

Table 5. The Multi-level Nature of Value Creation.

Actual firm-level performance Internal firm resources and capabilities External constituencies to the firm such as consumers Industry/market macro-level structural and contextual characteristics Ultimately, the source of value may be exogenous to firms, but it is possible to think about the

elements of consumer demand in better ways that enhance our ability to understand firm strategies and performance. Progress in this direction has come from conceptualizing ideas such as value and its creation in terms of perceived benefits to users and consumer surplus. This perspective involves moving away from a firm-specific view of profit to one that focuses on the interactions between firms and consumers—a shift in the level of analysis (Brandenburger & Stuart, 1996; Besanko, Dranove, Shanley & Schaefer, 2004).

Suppose that consumers enter into transactions with the intent of making themselves better off than they were prior to the transaction. In such a case, a discussion of value-creation ideas can proceed with some fairly specific meanings. For example, the degree to which the consumer is actually better off from the transaction can be seen as the consumer’s surplus. The value (perceived benefit) of a transaction to the consumer would be the maximum price that the consumer would be willing to pay, while the consumer surplus is the difference between that price and the price that the consumer actually paid. Carrying the accounting language further, the surplus can be thought of as the value of the transaction to consumers (on a variety of attributes) minus (1) the direct costs of the transaction, including installation

Drnevich & Shanley 2005a.doc

Page 9 of 26

and maintenance costs, and (2) any transaction costs associated with the product. When the consumer is a firm, consumer surplus as described here would be identical to the firm’s incremental profit.

A seller must deliver a substantial surplus to consumers on a consistent basis to compete successfully. This is not the same as giving the consumer all of the value created net of costs, because then there would be no incentive for the producer to continue. The value created from an exchange needs to be divided between consumers and producers. Consumer surplus represents the portion of the value-created that the consumer captures. The seller receives the price paid and uses the revenue to buy labor, capital, materials, and other inputs. The producer’s profit (price minus costs) represents the portion of the value-created that the producer captures. Adding together consumer surplus and producer profit gives the total value-created.

Linking Value Creation to Competitive Advantage

Seeing value creation in terms of interactions between firms and consumers permits the linking of value creation and competitive advantage. Competition among firms can be thought of as a process whereby firms, through their prices and product attributes, submit “bids” to consumers in an effort to secure their business. Consumers choose the firm that offers them the greatest surplus. On average, we would expect that a firm that offers a consumer less surplus than its rivals will lose the fight for that consumer’s business. (Of course, it is difficult for a firm to determine the mix of product and transaction characteristics to offer to consumers, as preferences can vary widely and are difficult to ascertain in advance.)

This view of competition has implications for pricing decisions, as consumer perceptions of value may be somewhat asymmetrical. Furthermore, a firm’s products can be very complex and different product offerings’ effects on consumer value are unclear. Firms that overestimate the willingness of consumers to trade off price for quality risk overpricing their products and losing market share. Conversely, firms that underestimate the willingness of consumers to trade off price and quality may fail to capture market value.

In conclusion, the importance of multi-level issues in strategic management is more than just a function of the historical growth of the field or of its inherent multi-level problem focused nature. In this section, we discussed two of the basic concepts of the field: competitive advantage and value creation. For each, we suggested that the core meaning of the concept implied a linkage of levels. Competitive advantage focuses on a firm’s capabilities relative to its competitors. Value creation relates to the firm’s capabilities and resources for providing products and services that meet the demands of consumers. Both of these core concepts have an embedded cross-level relationship between the firm, its resources and capabilities, and its environment. In the next sections, we explore these multi-level issues and their implications for strategic management research and develop a typology to address these issues. We conclude by discussing the potential implications and contributions of this work and offering some suggestions for future research.

WHAT’S THE REAL PROBLEM? ISSUES FOR MULTI-LEVEL STRATEGY RESEARCH

Is it a problem that strategic management’s phenomena are inherently multi-level in nature? Why

and how is it a problem that core concepts of strategic management, such as competitive advantage and value creation, are also multi-level? We believe that the “problem” derives not from the phenomena themselves, but from the difficulties that the presence of multiple levels of analysis poses for efforts to conceptualize, measure, and explain them. The fact that a phenomenon spans multiple levels of analysis means that multiple potential explanations can be offered at each level. How should one sort out and choose among these competing explanations? And how should one account for these potential multiple explanations at different levels of analysis?

As an example, consider the performance of General Electric Corporation (GE) at the close of the 1990s. By consensus and by most measures, the firm’s results were extraordinary. Corporate revenues topped $100 billion with operating margins of nearly 17%. Net earnings had increased more than 500% since 1981 and had doubled since 1993. Earnings per share (EPS) were at record levels. GE was the “most admired” company (Fortune) in the United States and the “most respected company in the world” (Financial Times) and it continues to remain a legend among major diversified firms (for more

Drnevich & Shanley 2005a.doc

Page 10 of 26

information, see GE’s Two-Decade Transformation: Jack Welch’s Leadership. Harvard Business School, Case #9-399-150 (2000); also see Welch, 2001).

How else might we interpret and explain GE’s results over this period? We could start by examining GE’s major business units and groups—more than 350 business segments in the year 2000. For each, we could fashion an industry analysis and consider the business strategy decision making and market conditions that generated each unit’s results. However, the sheer number of units involved, as well as the complexity of GE’s products and markets, would likely render such an exercise counterproductive as a way of understanding the parent firm. Alternatively, we could use a picture of GE’s results that aggregated subunit results, but this approach would not be meaningful or useful to unit managers or others interested in particular businesses.

While we might wish to begin our explanation of GE’s overall performance by looking at subunit results, it would soon be necessary to go beyond them and consider corporate strategic decisions such as mergers and acquisitions or new product and service initiatives, such as e-commerce. It would also be important to consider the processes by which corporate managers make decisions, plan and control operations, and select, train, and evaluate managers. While the immediate impact of these activities is difficult to assess, they almost certainly affect business unit operations and thus contribute to GE’s overall performance.

Along with corporate decisions and processes, anyone following GE in the 1980s and 1990s would have taken an interest in the leadership of its CEO, Jack Welch. Welch was renowned for his experimentation with GE’s strategies and processes, including the restructuring of corporate planning and control systems, the enhancement of executive development and training, the innovative use of stock options, and the fostering of efforts at reducing bureaucracy. He also pioneered GE’s moves into globalization, service businesses, and e-commerce. Welch’s stature was evident in the national media attention given to the search for his successor, which culminated in the selection of Jeff Immelt in November 2000.

Finally, a consideration of GE in the 1990s would require a consideration of the broader economic and political context of the times. GE is so large and diversified that its issues tend to mirror those of the larger national and world economies. In the 1990s, this context was shaped by the end of the Cold War and changes in defense priorities, the growth of globalization, the deregulation of health care and financial markets, the rise of the Internet, and the stock market and technology boom of 1999–2000.

Given the multi-level issues and multiple potential explanations discussed above, how do we fully explain GE’s performance without lapsing into an enormous case study of a unique firm? Is the firm’s performance due to Jack Welch? Is it due to the growth of particular business areas, such as financial services (GE Capital)? Who are GE’s competitors—against which firms should the company’s performance be compared? While GE is clearly an exceptional firm, these same issues are likely to apply to some degree in efforts to understand the strategic performance of many large firms. What is the best way to study strategic management at GE and, more generally, how should strategic management researchers take the potential for multiple explanations into account? How should the presence of multiple potential explanations be handled? Careful research designs will focus on a particular explanation and attempt to exclude alternative explanations. This idea lies at the heart of well-designed research (Campbell & Stanley, 1963), although it is absent all too frequently in published strategy studies.

When explanations span levels, however, their complexity increases and large sample studies become less feasible, because competing explanations can be very different from one another and prove difficult to research. For example, if one is attempting to explain a firm’s behaviors and its results in terms of its CEO’s characteristics or leadership behaviors, an alternative explanation may require a more involved examination of industry dynamics that may be independent of the CEO’s influence, but that coincides with his tenure. To address such alternatives, researchers often opt for industry or other control variables that permit them to isolate the statistical influences of a particular set of predictor variables. This approach is perfectly appropriate, provided that these control variables are not theoretically relevant to the issues under investigation. If they are theoretically important, however, it is inappropriate to control for them and doing so risks oversimplification (for which management research is sometimes challenged). So how could one pursue effective strategy research while addressing these problems?

One could start by recognizing the multiple levels inherent in a phenomenon. Once the multi-level nature of a strategy phenomenon is recognized, the question then arises as to which levels are the most important to study. In this regard, researchers may well have preferences rooted in their training and experience. For example, economists can be expected to look at industries and markets as a starting point

Drnevich & Shanley 2005a.doc

Page 11 of 26

for research but might be less inclined to consider the personality or character of top managers as important objects of study. Psychologists, by contrast, might be more likely to look for explanations in the individual and group behaviors of decision makers. Researchers from practitioner and consulting backgrounds might be drawn more to issues of control and implementation, whereas such issues might not hold much allure for researchers in traditional academic disciplines.

It is doubtful that researcher predilections should provide the basis for sorting out multi-level situations. While some CEOs, for example, are very powerful and capable of influencing the situations in which their firms compete, it is doubtful that more than a relative handful of such individuals exist. In most situations, CEOs may influence but are unlikely to determine the outcome of a situation, independently of the vast array of other factors that influence their firms and the broader business and regulatory environments. Similarly, while every business is situated in some economic market, it is often the case that what is most interesting and important about a firm’s strategy concerns is less how the relevant markets function and more the ways in which the markets do not work efficiently. Which of several possible levels of analysis is most important in a situation is ultimately an empirical question, provided some consensus can be reached among researchers about what “important” means.

Prior Attempts at Addressing the Levels Issues: The Industry versus Strategy Debate

Collectively, the stream of strategy studies that attempts to explain the relative importance of industry-, corporate-, and firm-level factors on firm performance represents an explicit attempt to sort out these types of relationships among levels of analysis (for a review, see Ruefli & Wiggins, 2003). This set of more than two dozen studies originated with Schmalensee (1985) and includes work by Wernerfelt and Montgomery (1988), Rumelt (1991), McGahan and Porter (1997, 1999), Brush and Bromiley (1997), and others. Much of this work is methodological in focus. While a detailed discussion of this research stream is beyond the scope of this chapter, these studies do raise some issues that are relevant to our discussion.

First, as this line of research has developed, differences in levels of analysis have become better articulated. What began primarily as a distinction between industry and firm effects soon developed to include corporate-level effects. More recent studies in this tradition have expanded this approach to consider the effects of business groups and strategic groups on performance (Khanna & Rivkin, 2001; Dranove, Peteraf & Shanley, 1998). These studies have further substantiated the multi-level nature of the determinants of firm performance.

While these studies have documented the influence of multiple levels, they have been less effective in explaining what these results mean for strategy. What does a finding of weak corporate effects mean? Does it indicate that corporate strategy is unimportant and that business units should be divested? Are industry-level effects equally important for all firms or just for some? Along with the extensive methodological debates addressed by these studies, criticisms of this line of work (Brush & Bromiley, 1997; Bowman & Helfat, 2001; Ruefli & Wiggins, 2003) have raised as an issue the need to clarify theory regarding the relationship of managerial decisions to the identified “importance” of effects at a given level. More thought needs to be given to the ways in which managers can influence firm performance and the ways in which this influence may be apparent at different levels of analysis—strategy theories need to clarify their treatment of these multi-level interactions.

The need for clarifying the relationships among levels in this stream has also become apparent indirectly in the reactions of scholars to controversial findings in this line of research—in particular, Rumelt’s (1991) finding of a small effect of corporate strategy on firm performance. Indeed, this finding clearly motivated several subsequent studies, which largely consisted of efforts to either (1) replicate it or (2) challenge it and substantiate the importance of corporate-level effects. Such observed reactions in the literature suggest that researchers share an implicit assumption of the importance of corporate-level phenomena, which is not surprising given the origins of the field and the problem-focused nature of its phenomena. They also raise the question of how the extent of current practice regarding some area of activity speaks to its “importance,” especially when practice appears to conflict with research results.

Theoretical critiques of these studies are also noteworthy and reflect a more general concern about multi-level explanations—namely, that strategy theories need to incorporate multiple levels rather than choosing between them. While many researchers recognize the potential influence of multiple levels of analysis on performance, the nature of that influence is often left implicit. The more explicitly it is recognized that firms and their managers can exert their influence across levels, and in turn be influenced by activities at those levels, the less attractive a variance decomposition approach to questions of importance will appear.

Drnevich & Shanley 2005a.doc

Page 12 of 26

Additional Implications of Theorizing across Multiple Levels of Analysis

Analyzing the long-term strategic performance of firms in research-intensive industries provides another example of the complexity of theorizing across levels. One could begin with an explanation at the firm and industry levels and discuss strategy in terms of product–market dynamics. The story would quickly expand to the corporate level by recognizing that some activities, such as testing, government relations, and marketing, are more amenable to economies of scale than are others. It would then be necessary to broaden such an analysis to consider the state of knowledge regarding the technologies involved, as well as the institutional structure of regulation, innovation funding, and cooperative relationships among industry participants. In addition to considering the firm and its environment, explanations would need to consider a firm’s internal structures and processes—for example, whether its R&D authority is centralized or decentralized, or whether significant R&D projects are organized on a modular basis. An intergroup analysis of project teams could also be important, as could even more micro-level studies of the group/team characteristics and activities associated with successful R&D project outcomes.

Baldwin and Clark (2000) provide this sort of multi-level approach in their analysis of the evolution of modular ideas in the computer industry. They document the industry’s transition from a period of dominance by IBM to its current fractionated state of innovation-driven competition. In doing so, they use ideas of modularity to link issues of product design, organizational architecture, outsourcing, innovativeness, industry structure, and regulation.

Conceptualizing strategic situations to affirm multiple levels of analysis, however, is the stuff of which paradoxes are made. As an example, consider the dichotomies that have long plagued strategy regarding environmental or market determinism and managerial choice. On the one hand, social contexts are very influential on their members and efficient markets will tend to nullify temporary individual advantages, as well as most pretensions toward long-term competitive advantage. On the other hand, efficient markets presume market actors who are capable, are highly motivated, and believe that they can “beat the market.” How can both levels be jointly affirmed? If markets are efficient, how can reasonable individuals believe that they can beat them? If individuals can beat markets, how can the markets really be efficient? While resolving these types of anomalies is beyond the scope of this chapter (if it is possible at all), we do think it is possible to improve our thinking about multi-level problems.

Finally, we must recognize the cost and feasibility issues involved in conducting multi-level research. At the same time, we think it is both feasible and desirable to examine the ways in which strategic management theories link levels of analysis. While cross-level strategic issues are rarely explored on an explicit basis, they are considered implicitly in the general theoretical approaches in common use in the field. We explore these more implicit linkages in the next section. Doing so will help researchers to make their cross-level assumptions explicit, which in turn will permit them to craft better research designs and obtain more useful results.

HOW DO STRATEGY THEORIES LINK LEVELS? If strategic management phenomena are inherently multi-level and problem-focused, and if this is

at least implicitly recognized by researchers, then perhaps the real issue is not whether multiple levels of analysis are linked, but rather how they are linked in the dominant theoretical perspectives of the field. What are the different conceptual mechanisms, or chains of reasoning, by which theories have linked different levels? Most often, they are fairly abstract and constitute chains of assumptions rather than testable propositions (indeed, a problem with propositions about multi-level effects is that they involve unobservable relationships for which the available data will be ambiguous and potentially speak to multiple levels at once, rendering testing difficult). It is with such mechanisms that strategy theories add value over explanations focusing on a single particular level. In this section, we discuss three different conceptual mechanisms for linking levels of analysis and provide some examples of each (see Table 6).

Drnevich & Shanley 2005a.doc

Page 13 of 26

Table 6. How Strategy Theories Link Levels. Linkage by Transaction Linkage by Managerial role Linkage by Atmosphere We will discuss the relative advantages and disadvantages of each mechanism as a means of

linking levels. Of course, all three may not be equally effective in every situation, so we will therefore offer some suggestions as to which are likely to lead to better results in which situations.

Linkage by Transaction

A first way to link levels is with a common transaction or behavior that all of the actors in a domain can, in principle, perform. The term “transaction” here is taken very generally and can include such activities as informal social exchanges, market exchanges, long-term contracts, or mergers and strategic alliances. The classic example occurs with an economic market. A market consists of a number of participants, who can enter, transact, and exit according to their capabilities and the opportunities available to them. The linking transaction that is the unit of analysis here is the economic exchange, which involves a buyer and a seller. Sometimes, these exchanges are discussed in terms of “spot market” contracts. The “market” itself is apparent in the set of interactions among all buyers and sellers, from which the quantity of goods and services provided and the prices charged for goods are determined.

As a focal point for analysis, one can begin at the level of an individual actor, trying to sell his or her goods and services or shopping around for what the individual wants to buy. One can then aggregate using the market transaction as the unit of analysis, which permits a focus on the interactions between buyers and sellers. This is akin to the distinction made in network analysis between focusing on individual network nodes or on the dyadic links between network members (Burt, 1992).

If one uses individual actors or their transactions as the basis for analysis, the levels of analysis are linked by a process of aggregation. Here, the “micro” level consists of the individual transactions and their participants. At a more “macro” level is the market itself, which comprises the overall results of buying and selling, the presence or absence of persistent inequalities among buyers or sellers, and whether the market “space” is homogenous or heterogeneous with varied niches. Broader levels of analysis are linked to narrower ones through the aggregation of transaction results. Market “structure” arises from these interactions of market participants.

Economic approaches to strategy (Porter, 1980, 1985) often use transaction ideas as the basis for linking levels of analysis within the firm and beyond, within product markets or as part of a larger corporate context. Transaction cost economics (TCE), especially as developed by Williamson (1975, 1985), also employs this approach, with its emphasis on the transaction as the unit of analysis. For example, firms make decisions either to perform an activity themselves (vertical integration) or to buy from a market specialist. Aggregating from the level of the transaction to the level of the firm, a firm’s strategy can be seen as the sum of its “make versus buy” decisions.

For TCE, shifts in level of analysis also occur when simple aggregation is no longer feasible. For example, the shift from a business to a corporate level occurs when a firm becomes too large and complex to be organized functionally (Williamson, 1975). This is why multidivisional (or M-form) structures are introduced. Along with its coordination tasks, an important purpose for such a structure is to provide an “internal capital market” for divisions and subunits. The approach of agency theory (Jensen & Meckling, 1976; Eisenhardt, 1989) to levels of analysis is similar to that of TCE in its focus on the relationships between principals and agents as a basis for firm governance and interfirm relations.

The resource-based view of the firm (RBV) also embodies what we call a transactional approach for linking levels. A firm’s activities comprise exchanges in which it is paid for various combinations of resources and capabilities that are valued by consumers (Wernerfelt, 1984; Barney, 1986; Peteraf, 1993). The RBV differs from more traditional economic approaches in that it emphasizes how a firm’s sustainable performance in generating profits (rents) stems from its possession of scarce, valuable, and difficult-to-imitate resources that are not actively traded and priced in the firm’s factor markets. This idea suggests market imperfections, in which no simple relationship exists between the behaviors of markets and the behaviors of participating firms. Lippman and Rumelt (2003) argue for a simpler “payments perspective” as a micro-foundation for a resource approach based on payments to firms for valued resources, without reference to whether those resources are priced in markets.

Drnevich & Shanley 2005a.doc

Page 14 of 26

Transaction linkages can be attractive means for linking levels. They provide a simple and logical basis for theorizing that is linked with the behavior of individual actors. If we wish to know a corporation’s strategy for diversification, for example, it is reasonable to consider the firm’s portfolio of businesses, especially any changes made during some period via merger, acquisition, alliance, divestiture, or spin-off. It is also plausible to analogize between levels regarding some economic transactions and social exchanges. Social relationships between two individuals, for example, have clear similarities with those of more “macro” actors, such as groups and organizations, and metaphors of marriages, courtship, conflict, and divorce are common ways to view mergers and acquisitions on the one hand or divestitures on the other hand.

Theories that utilize transaction linkages are not without their difficulties, however. They must treat as exogenous systemic characteristics that are not reducible to the aggregated transactions of actors. For example, the rules by which an exchange system operates are often not determined by the participants and are exogenous to the transactions themselves. Furthermore, while market transactions can to some degree be aggregated, the structure of a given market may not be reducible to the aggregated actions of participants; instead, it may also take into account such factors as regulation, possession of critical resources, collusive action by dominant industry players, or historical idiosyncrasies, all of which constrain the actions of individual firms. These gaps are considered in terms of market failures in TCE. Industry analysis ideas also embody such gaps, in that the desirable strategic positions for firms within an industry are those where they are shielded from competition and imitation from rivals or new entrants. The more closely an industry’s conditions approach those of a competitive market, the less room individual firms have to achieve an advantage. Divergence from competitive conditions, however, is critical to these types of explanations, but is generally taken as exogenous to the behaviors of particular firms. (For an exception, see Sutton, 1992.)

Building theories around dyadic relationships, exchanges, or transactions may render it difficult to identify the locus of agency in a given situation. If our focus is on transactions, for example, how do we distinguish between transactions that are separate and distinct from those that are linked together as part of a larger program? If our unit of analysis is not necessarily where the critical decisions are being made, then either theory must be adjusted for particular and even idiosyncratic circumstances (and thus be less parsimonious); otherwise, each theory will lead to confusing results. Looking at a network of business units, for example, it may not always be clear whether the network actors are independent and autonomous or whether the network includes a clear leader who influences the behaviors of others. Similarly, in considering a firm’s merger activity, it is not clear whether mergers constitute separate decisions or are part of a larger corporate strategy embodying multiple mergers, divestitures, alliances, and internal initiatives.

A related problem is identifying who in a complex corporate actor is actually making the decisions. Continuing the example of mergers, in some firms these decisions are made at the corporate level. In others, merger decisions are made by managers of groups, divisions, or even smaller business units. In addition, studies of merger performance as measured by changes in stock prices often embody heroic assumptions about the consistency with which corporate decisions about a merger translate into implementation decisions by lower-level managers. Without information on the intra-organizational details of merger integration, market evaluations may not be fully informative about merger performance. Evidence to date suggests that corporate representations do not consistently translate into implementation success. This consideration is especially critical for stock price studies of firm strategy, because internal corporate information is much less readily available to investors for all except the largest firms. For example, Kaplan, Mitchell, and Wruck (2000) report a case analysis of the discrepancies between the market evaluation of mergers and their implementation success.

Bridging levels by transactions may also call the boundaries between levels into question, as well as the boundaries of the firm itself. For example, taking an agency perspective and viewing the firm as a “nexus of contracts” (Alchian & Demsetz, 1972) makes it difficult to justify the existence of the firm or its authority structure when a contract-based market solution would be preferable. Why would such a costly structure be desirable if firms are simply the aggregation of dyadic contractual relationships among members, each of which can be understood and governed on its own terms? In a related vein, Miller (1990) argues that the transaction costs of organizing within a firm can be as troubling as the issues associated with external contracting. He ends up augmenting a transaction cost approach with an emphasis on culture and relationship building by general managers.

Drnevich & Shanley 2005a.doc

Page 15 of 26

Social exchange approaches to firm behavior (Pfeffer & Salancik, 1978; Pfeffer, 1987) also use transaction logic to link levels of analysis. They emphasize less formal social exchanges rather than contracts and other formal exchanges (Coleman, 1990; Levine & White, 1961; Blau, 1964 The idea here is the same as with economic exchanges, however, at least in terms of bridging levels. The order that is apparent within firms is explainable (at least in part) as the cumulative result of social exchanges among members. At the interfirm level, the activities of particular firms are linked through power–dependence relationships with other firms, regulatory organizations, and other stakeholders (Thompson, 1967).

Similar issues to those noted with transaction cost industry approaches also arise for theories relying on social exchange. While it is possible to see a micro logic of interactions, many aspects of collective behavior seem to depend on macro factors that are not the cumulative result of dyadic exchanges. These relationships have frustrated efforts to links levels of analysis through social exchanges (Willer, 1999). For example, Burt’s (1992) theory of networks and structural holes acknowledges the transactional logic discussed previously. At the same time, the most important part of his analysis concerns the structural characteristics of networks, such as centrality and functional equivalence, and the ability of actors to control important network positions, or span “structural holes.” While actors and dyadic exchanges matter for understanding action, so too do the positions of actors within the network.

Difficulties may also arise in identifying a locus of agency with exchange theories. Suppose that one observes an exchange between two parties. Without more information than the fact of an exchange, it is difficult to tell who profited if there was an imbalance associated with it (Laumann & Knoke, 1987). Presumably both parties are willing, but one may benefit more than the other. It is also difficult to tell whether exchanges are distinct transactions or part of a larger history of existing exchange relationships between the parties.

As with theories of economic transactions, theories of social exchange have trouble explaining the clarity and persistence of firm identity and boundaries. If firms are run by groups of powerful actors, each pursuing its own interests at the expense of other groups, then they are at constant risk of dissolution. In recognition of this fact, some theorists have enlarged the role of management and added the condition that managers must contribute to overall firm performance (Aldrich, 1999). This anticipates our second linking mechanism—linking levels through some form of managerial bridging role.

Linkage by Managerial Role

A second way to link levels of analysis is through the delineation of a general managerial role. Firms are called upon to make decisions in a variety of areas, from supply management and production, to sales and marketing, to research and development. These decisions span levels of analysis as well, from micro-level dealings between employees and customers, to group and organization decisions concerning operations, to strategies for interacting with other firms, government agencies, and media organizations. While these decisions can be looked at and analyzed in isolation, the “firm” must attend to them all together in real time to determine how to allocate its attention. The job of the general manager—how these managers coordinate the varied decisions of their firms—has evolved over time as firms have evolved to meet these decision burdens. It should not be surprising that many strategic management theories have focused on the central role of the general manager as a way to link the diverse strategic decisions of a firm. In doing so, these theories serve to bridge levels of analysis between the firm and its broader environment. They also link levels within firms, such as in studies of planning and control processes, which consider how to link the divergent perspectives of corporate, divisional, and departmental levels to facilitate planning, capital budgeting, or internal venturing (Bower, 1970; Burgelman, 1983).

The classic example of this use of a managerial linking role is in Barnard’s (1938) study of the functions of the executive. He saw the role of the top manager as that of distributing and balancing the inducements and contributions of all those actors who were necessary for the success of an enterprise in the broader environment (what some call stakeholders), whether they were employees, customers, suppliers, or buyers. This role represents a bridging of what we have come to know as organizational, competitor, and market levels, performed by an individual or small team, and it goes well beyond dyadic transactions with particular constituents.

Barnard’s perspective has continued to powerfully influence strategy research. A full accounting of his influence is beyond the scope of this chapter, but some basic points can be made. His work influenced the development of the Business Policy Group at the Harvard Business School (Andrews, 1971) and continues to influence top management research (Donaldson & Lorsch, 1983; Kotter, 1982;

Drnevich & Shanley 2005a.doc

Page 16 of 26

Gabarro, 1985). Barnard also strongly influenced the work of March and Simon (1958), who adopted his inducements–contributions framework as a basis for their own frameworks. Cyert and March (1963) further developed ideas relating to general manager roles in their behavioral theory of the firm, in which managerial roles were exercised by a top management team (or “dominant coalition”) whose goals became the goals of the firm and whose actions aligned the organization to its uncertain environment. Finally, Barnard’s influence is seen in current popular approaches to general management (Collins, 2001).

Two other scholars who have focused on general management as a critical component of their theories are Chandler (1962, 1977) and Penrose (1959, 1960). Chandler’s idea of strategy as a firm’s long-term goals and objectives and their implementation, coupled with his focus on the importance of professional managers and managerial hierarchies, make general management a central concept of his research. While Penrose (1959) is often associated with the RBV, she actually placed a firm’s managers in a central role that linked the firm and its capabilities with its environment. She saw firm growth as being governed by the interaction between internal resources and services (capabilities) in relation to external market opportunities. The task of overseeing and guiding this interaction falls to the firm’s managers, who use their specific knowledge of firm capabilities in conjunction with their vision of market opportunities to craft the most effective growth strategies and then adjust them on the basis of interactions with the firm’s environment (Penrose & Pitelis, 2002; Ghoshal, Hahn & Moran, 2002). By linking the firm to its environment, managers enact the crucial level-bridging function for Penrose’s theory.

Linking levels of analysis by managerial roles offers a number of practical and theoretical benefits. Such a link is plausible and reflects the reality of top managers directing large firms. Top managers are highly trained and successful, well paid, highly visible, and often influential participants in their firms, industries, and communities. They are often articulate as well, and have ready explanations to offer regarding their contributions to their firms. It is reasonable to assume that these managers may be vital links between their firms and their environments.

Incorporating an endogenous role for general management also permits a theorist the flexibility with which to address the variety of behaviors that are apparent among real-world firms. Without such flexibility, a theorist could be drawn into a contingency logic expecting an isomorphism of sorts between environmental characteristics and firms’ decisions. Incorporating a managerial role into a theory allows for a given environmental set of opportunities and constraints to be perceived quite diversely by different managers. In this sense, Child’s (1972) critique of structural contingency theories was not a rejection of the need for alignment with the environment, but rather a clarification of how such an alignment would come to pass through the strategic choices of a firm’s managers. It is the environmental conditions as perceived by managers that matter for the organization, and managers choose how to view the environment and presumably how to respond to its environmental demands (Hickson, Butler, Cray, Mallory & Wilson, 1986).

While this approach has its advantages as a way of bridging levels, the general management role is messy and difficult to specify (Kotter, 1982). This complexity is to be expected, however. While the varied decisions facing a firm can be analyzed according to their respective economic and social logics, how these decisions fit together will, of necessity, be more complex, disorganized, and idiosyncratic and less amenable to systematic analysis. As a result, a potential criticism of general management theories is that they do not resolve the levels problem as much as package it and compartmentalize it. Given the relatively low levels of accumulated knowledge on general managers (Bennis & Nanus, 1985), one is tempted to see research on general managers as identifying what we do not know rather than what we do know. This also suggests that linking levels by a focus on managerial roles may not be a panacea.

A related problem with these theories is a potential confusion of causality. Because theories of general management and executive leadership link levels of analysis and embody the least rationalized aspects of a firm’s decisions, they may not be very helpful in explaining a firm’s results. Perhaps this is one reason why research on general management has produced so few accumulated results. For example, if a manager’s tenure coincides with a period of very good or very poor firm performance, what conclusions can be drawn regarding the role of the manager in the firm’s results? The firm’s incentive system will likely reward the manager for the good performance (although it may also reward him or her for poor performance). We can expect that many top managers will take credit for the good results and provide their own rationalizations for poor results. In any event, it will still be unclear what the true contribution of the manager was to his or her firm’s performance. While we know that general management and executive leadership are important, we are less clear regarding why or when they are important, which leads us to consider yet another mechanism—linkage by atmosphere.

Drnevich & Shanley 2005a.doc

Page 17 of 26

Linkage by Atmosphere

A third way to link levels is through the effects of a shared context of interaction or atmosphere. Several different aspects of social context are discussed here. The intuition for referring to them as “atmosphere” comes from Williamson (1975) and ultimately concerns Adam Smith’s idea of an “atmosphere conducive to trade.” The idea is that the more participants share such a background, the easier it will be to explain multi-level firm dynamics. In this sense, atmosphere constrains the strategic behavior of managers and their firms.

The importance of context has a long tradition in economic sociology, where context is seen as not just constraining on actors but also constitutive, in that it helps to determine what is important for actors and how they should go about pursuing it and interacting with others (Baum & Dutton, 1996; DiMaggio, 1994). Sometimes this context is discussed in terms of culture. Increasingly, the social context in which firms interact is taken more broadly to include the institutional setting, which includes not only culture, but also legal and regulatory regimes, normative structures such as status orderings, and common historical ties.

Atmosphere here is not a distinct mechanism, but rather something that links levels by reducing the variety of behaviors across levels, thereby rendering the complexity of a multi-level situation less problematic. It is not a contextual determinism but more a corrective to the “undersocialized” individualistic views of action that have been common in economic views of strategy (Granovetter, 1985). A particular atmosphere does not by itself imply a particular decision or transaction logic on the part of firms or their managers. As a consequence, it is likely best employed in conjunction with transactional or general manager logics. For example, the more homogenous the environment in a given nation, the easier it will be for general managers to learn about the requirements of their institutional structures and craft successful strategies to gain legitimacy (Aldrich, 1999, p. 229).

Firms and industries do not just operate in the traditional space assumed by economic theories of strategy, but also within complex institutional structures that condition how industry participants think about their tasks, organize their behaviors, and respond to regulation by government and nongovernmental organizations (Scott, 2001). These structures can greatly constrain the behaviors of firms, whose managers actively seek to obtain social legitimacy for their firms (Oliver, 1997). The extent to which the potential for value creation for an industry or firm is a function of institutional constraints has yet to be determined, but it is likely to be high in most settings. At a minimum, a homogenous cultural/normative environment will likely reduce search and decision-making costs (Kreps, 1990).

Even using atmosphere as a complementary means for bridging levels, however, has some inherent limitations and will likely be useful for studies of relatively stable industry situations. Institutional explanations have typically not been effective for explaining dynamic situations, or events such as drastic industry change, as in periods of deregulation (Hirsch, 1997). Moreover, as institutions become more influential and more heterogeneous, the problems they pose for firms will become more—rather than less—complex, making atmosphere a complicating—not simplifying—factor. This is especially the case in settings where firms can, either individually or collectively, undertake joint institutional strategies to improve their situations versus regulatory agencies and minimize the number of constraints in their business dealings. It is unclear whether such strategies are effective for improving performance (Schnatterly, 2003; Waddock & Graves, 1997; Fombrun & Shanley, 1990).

Sorting Out the Mechanisms

Strategic management theorists recognize the multi-level nature of their target phenomena and attempt to address levels issues in their research through a variety of conceptual mechanisms that provide logics for explaining how the activities of firms and their managers lead to a variety of complex consequences that become apparent at different levels of analysis. These mechanisms include linkage by transactions/exchanges, linkage by managerial roles, and linkage by atmosphere. These ways of linking levels have their relative advantages and disadvantages. For example, transactional approaches have proven very amenable to modeling, but may also be more abstract and reductionist in dealing with the richness of the situations being explained. While some types of behaviors may aggregate well to macro levels of analysis, others may not, and many macro phenomena may not be reducible to exchanges or contracts. Conversely, focusing on managerial roles may reflect the fluidity of corporate situations but may also render an analysis less suitable for modeling.

Drnevich & Shanley 2005a.doc

Page 18 of 26

Raising the advantages and disadvantages of these approaches to linking levels should not suggest that one approach is “better” than the other approaches. Market and exchange theories have proven extraordinarily successful in economics, sociology, political science, and other areas. The relative advantages and disadvantages of these theories are well known and scholars continue to employ them productively. However, it is interesting to note that while exchange and market models are very important in strategy research, many of the fundamental views of strategic management and firm behavior remain oriented toward general managers. This perspective most likely reflects the continuing tension in which strategic management finds itself as an academic discipline studying a problem-focused applied subject matter of continuing interest to practitioners. Furthermore, it suggests that the most innovative theories may be those that work toward integrating transactional and managerial approaches (for an example, see Hermalin, 1998).

IMPLICATIONS FOR THEORY AND RESEARCH What are the implications of the preceding discussion? Why is it important to focus on the multi-

level dimensions of strategy? Are the three linking approaches discussed previously equally plausible or useful for researchers? In this section, we will draw out some of the implications of our analysis and offer suggestions for researchers. We consider the benefits of making explicit what has largely been an implicit consideration of levels of analysis issues. We also make suggestions for improving research designs on levels issues. We conclude by considering specific topic areas in which a more explicit consideration of levels of analysis issues would foster research progress.

Making Levels of Analysis Issues Explicit

Our interest in this chapter has not been to introduce levels of analysis issues as concerns to which strategy researchers must attend. These issues have been present throughout the history of the field, and most researchers have dealt with them from time to time. What has been done less frequently is to consider them explicitly, which is what we have tried to do here. How does considering these issues explicitly help research in strategic management? We offer some general observations and potential contribution in this section (see Table 7).

Table 7. Implications of Making Levels of Analysis Issues Explicit.

Levels of analysis choices matter in strategy research Approaches to dealing with levels of analysis matter Theoretical clarification helps one make choices regarding levels problems Easy fixes to levels problems in strategy may not exist 1. Levels of analysis choices matter in strategy research. The conclusions one draws about a

particular type of firm will depend on how one defines its served markets. Are markets small and local? Studies that define markets narrowly may be more likely to reach conclusions consistent with the potential for effective strategic action by firms, whereas studies defining markets more broadly will come to conclusions more consistent with competitive assumptions. Similar points could be made about studies of the firm in its social context. Which type of error is more likely? That depends on the “true” market served by a firm or the “true” set of environmental influences on its managers. A researcher can only approximate these factors, subject to a range of influences. We think it would be better for such choices regarding the firm’s environment to be made explicitly rather than implicitly or on the basis of available data.

Not only are industry and market definitions important, but the definition of levels presumed to influence decisions within the firm (or organization of interest) is also critical. Who is presumed to be making decisions within a firm about mergers and acquisitions? Will managers charged with making merger decisions be the same ones charged with implementing them? Does the practice of firms regarding mergers vary within an industry? Questionnaires that might be very appropriate for business-level managers in one firm might prove unintelligible to the same types of managers in other firms if these decisions are made elsewhere in the hierarchy. What if corporate and business unit managers influence

Drnevich & Shanley 2005a.doc

Page 19 of 26

merger decisions in different ways? Of course, researchers must make choices, and inevitably error is attached to any choice. Our point is simply that such choices should be considered explicitly.

A response to this situation may be to handle concerns about levels through the use of control variables. However, if strategic management issues are inherently multi-level, then the use of control variables may be inappropriate and/or problematic. Controls are appropriate when the variable being controlled is influential but not central to the theoretical interests of the study; otherwise, controlling for a theoretically important variable is problematic to good research design. It is our contention that levels issues often are fundamental to the theoretical interests of strategy studies and thus should not be controlled. At a minimum, the rationales for the use of controls need to be elaborated more than is commonly found in current research.

2. Approaches to dealing with levels of analysis matter. In our discussion of the different

approaches for linking levels, we noted the strengths and weaknesses of each. It is doubtful that any of the three approaches is uniformly “best” for handling levels of analysis issues. However, this does not mean that these approaches are interchangeable. On the contrary, we believe it likely that studies of the same phenomena that employ different approaches will reach different findings and perhaps come to very different conclusions. So which of these approaches should be used? As a starting point, we think it is necessary to explicitly consider how levels of analysis issues are to be handled, so as to ensure that a study’s results will be determined by the nature of the phenomena being studied and not unintentionally by the tastes of its researchers. The tastes of researchers certainly matter, but other factors do as well, including the objectives of a study, the nature of the available data, and the resources available for a study.

How might the choice of one approach versus another matter in a study? We have already suggested that a transactional approach will focus on a particular transaction, exchange, or related interaction and then bridge levels through a process of aggregation. In contrast, an approach focusing on managerial roles will consider how the behavior of the individual or individuals exercising general management functions will serve to integrate the demands of multiple levels from a given situation. A comparison of these mechanisms suggests that studies, even of similar phenomena, will differ on a number of dimensions. Transactional studies would have relatively large sample sizes and employ relatively standardized data. For example, studies of mergers and acquisitions can use CRSP or SDC data, or even the FTC database, while studies of firm innovation behavior can access popular patent databases. Some basic hypotheses can be tested on fairly large samples with fairly standard data. In contrast, managerial studies will tend to have smaller samples. Data collection will be more difficult and the data in general will be less standardized and less available. Some of the classic studies (Kotter, 1982) have two dozen or fewer respondents. Studies of merger implementation have relied upon case data and smaller samples (Shanley & Correa, 1992; Kaplan et al., 2000).

How would the results of different approaches differ for the same phenomena? It depends on what is being studied, of course, but it is difficult to imagine that the results would not differ. Small-sample studies using data obtained from managers, for example, may be biased toward reflecting managerial interests in the topic of the study (Shanley & Correa, 1992). Regarding mergers, large-sample studies of various types have called merger performance into question (Porter, 1987; Ravenscraft & Scherer, 1987; Seth, 1990; Sirower, 1997). Of course, even with these results from academic studies, merger and acquisitions, driven by managerial decisions, remain popular.

This tension between academic and practitioner approaches is not new, and the problem of levels is just one of several points on which these approaches may differ. Considering the levels problem explicitly may be useful for a variety of reasons. For example, it is not clear that academic and practitioner approaches to levels problems are fundamentally opposed to each other. Trying to understand how a market works, for example, does not imply that the question of how a participant in such a market should make decisions is unimportant. Similarly, understanding how institutional context operates in an industry setting does not mean that questions of firm agency or institutional change are unimportant. The problem arises when an approach is applied to the wrong question or when the conclusions from one study are applied uncritically to other contexts. This possibility may not be a fundamental issue of strategic theory, but it is an issue that can be addressed by making theoretical and study choices more explicitly.

Drnevich & Shanley 2005a.doc

Page 20 of 26

3. Theoretical clarification helps one make choices regarding levels problems. One way in which the three approaches differ is in the elaboration of theory regarding the role of managers. The more detailed a researcher’s expectations are regarding the activities of managers and the ways in which they can influence their firm and its environment, the more likely it is that a managerial role approach to linking levels will be chosen. The less well developed the expectations regarding managerial action, and the more focused a researcher is on a focal set of common behaviors, the more likely it is that a transactional approach will prove effective.

We are not suggesting that theoretical clarification will automatically lead to a choice of one approach over another, but rather that clarification will help match the mechanism selected to the needs and expectations of a study. This is not a terrible burden to place on strategy researchers. Whichever approach to handling levels is chosen, it should be reflected upon rather than chosen by default. Widely differing views in the field dispute what constitutes “theory”—from those favoring a rigorous formalism with deduction and prediction, to those who view theory as more descriptive and sense-making, to those who view theory as the expected associations between a set of variables. Spending more time working through the theoretical expectations for cross-level interactions will likely prove useful whatever design is employed.

4. Easy fixes to levels problems in strategy may not exist. There is a temptation to consider

levels of analysis issues as symptoms of strategy’s early stage of development as an area of social science research. The implication of doing so is to suggest that given sufficient time and the accumulation of sufficient research results, these “problems” will become better understood and less difficult for researchers. Unfortunately, considering the nature of levels problems in strategy gives us cause to doubt this hopeful prognosis.

To start with, the phenomena that are of most interest to strategic management scholars are inherently multi-level. The potential for strategic decisions to commit firms deep into the future and reduce their flexibility in the face of change is also key to ideas of commitment and sustainability and stems from the ability of managers to link their firm’s resources and capabilities to environmental conditions. A focus on the decisions and behaviors of top managers has been central to the field since its inception and is unlikely to change.

In addition, strategy has maintained its dual audience of academics and practitioners. This duality has ensured a continued focus on practitioner problems and their solutions, a continued tension between explanation and prescription in research, and a tendency toward more realism and less abstraction in strategy theories. All of these factors will work toward promoting more managerial approaches to levels issues, even as more traditional academic pressures may favor the benefits of more rigorous transactional approaches.

CONCLUSIONS AND SUGGESTIONS FOR FUTURE RESEARCH Arguing that strategic management theory and research needs to recognize and embrace its

inherent multi-level nature does not mean that existing theories are inadequate or that existing research approaches should be discontinued. For a wide range of topics, these theories, coupled with focused research designs, generate useful results. Pointing out the multi-level nature of strategy research does mean that for some topics more work across levels will be necessary if research results are to accumulate.

How should progress be made on multi-level issues? One tactic is to conceptualize specific issues and problem areas in terms of how they involve multiple levels of analysis, as we have done with our focus on competitive advantage and value creation. Doing so forces the researcher to specify the issues involved in an area in a manner consistent with the requirements of multiple levels and thus recast how research can proceed. We believe that understanding the intersection of levels of analysis provides opportunities for theoretical insights (Coleman, 1990; Lonergan, 1970). It may also help avoid some of the theoretical problems, such as that of tautology, inherent in some more conventional approaches for which strategic management theories are frequently attacked (Camerer, 1985; Powell, 2001; Priem & Butler 2001).

Another way to proceed would be with the use of meta-theory or integrative efforts across levels of analysis. Along these lines, prior efforts to develop evolutionary views of strategic management theory (Kogut, 2000) are particularly useful because they provide us with a grounded review of the dominant

Drnevich & Shanley 2005a.doc

Page 21 of 26

perspectives. Furthermore, contributions to the field of strategy and other areas could no doubt be made by taking similar views of appreciative or integrative inquiry. Such approaches would assume that different theoretical traditions might benefit from a compare-and-contrast exercise regarding how they viewed similar phenomena. For strategy research, for example, the interaction of industry economics and economic sociology would be enlightening.

Of course, we are not arguing that theories should be integrated wherever possible. This view has long been a chimera in the social sciences, as seen in the rise and fall of such fads as systems theory. Replacing a number of inadequate theoretical bodies with a reduced number of more cumbersome ones is clearly not desirable. We would argue instead that efforts to address multi-level issues should be problem or issue driven and that their success should be determined on the grounds of usefulness and pragmatism. If such efforts to consider multi-level issues in a different way prove useful in accumulating research results and advancing inquiry, then they should proceed. Table 8 provides an overview of suggested areas for future research.

Table 8. Suggestions for Future Research.

Value redistribution versus creation Competitive benchmarking, advantage, and distinctive competence Strategic pricing Several areas of strategy research would benefit from a prolonged consideration of levels of

analysis issues. Some areas (mergers and acquisitions; innovation strategy; strategic groups) have already been mentioned in passing, but are too voluminous to consider in more detail here. The areas discussed below bear directly on the issues of value creation and competitive advantage that were discussed earlier.

1. Value Redistribution versus Creation. If “value creation” is to mean more than just a new

way of saying “profits,” then it must be possible, both theoretically and empirically, to distinguish between strategies that create value and those that just move value around among market actors. Do firm strategies actually create new value? It is likely that many successful strategies fail to create value and at best just redistribute value away from some products and uses to others, without providing any new benefits for consumers.

Market power explanations have contended that some aspects of interfirm transactions do not create new value and may actually destroy it, such as through collusion or anticompetitive pricing. Recent work on strategic groups (Dranove, Peteraf & Shanley, 1998) has contended that strategic interactions lie at the heart of strategic group effects, calling into question whether strategic industry groups—even those whose existence can be ascertained—actually create any value at all. Work on market power aspects of strategies must also consider the industry conditions in which dominance strategies are sustainable (Shamsie, 2003).

2. Competitive Benchmarking, Advantage, and Distinctive Competence. A related set of

issues concerns the standards to be used for assessing the meaning of results. On the one hand, concerns about the RBV (and uniqueness), sustainability, and distinctive competence suggest that the bases for superior firm performance are local and highly individualized, and that performance standards should be similarly focused. On the other hand, competitive advantage and benchmarking ideas suggest that performance can be best assessed in terms of some reference set of other firms. This may be problematic, however, as the appropriate reference group may be far from clear and could vary widely depending on the performance dimension of interest. It suggests that firms looking at performance locally may miss the opportunity to see what performance gains are possible by not identifying the best reference firms. Both views are important, but their reconciliation is not obvious.

Whether the comparison group for performance is defined broadly or narrowly, it will always be necessary to consider how industry context influences performance. A tradition of research has assumed that industry conditions are exogenous to managers and constrain performance possibilities. There may also be possibilities for strategy to influence structure, either individually or collectively. In such a case, performance expectations and results will need to be considered differently. Furthermore, the technological and regulatory environment in which a firm operates may be sufficiently volatile that collective strategies may be required for successful adaptation and more traditional views of performance may prove inadequate.

Drnevich & Shanley 2005a.doc

Page 22 of 26

Assessing performance will prove even more problematic for diversified corporate actors. Strategic performance for these firms will include the issues raised previously, along with how the firm’s businesses interact. A further complicating factor is the reality that performance judgments for corporate actors will be generated by the interaction of corporate policies and procedures on the one hand, and the judgments of business unit managers on the other hand. Business unit managers will have choices regarding how they define their environments to corporate managers, while corporate managers will have choices in their oversight and motivation of business unit managers (Welch, 2001, p. 392). It will be necessary to know how different levels within a firm have interacted to appreciate the firm’s performance history.

3. Strategic Pricing. Research on strategic pricing may provide a good vehicle for developing

knowledge on value creation and competitive advantage. This research has not been as significant to date as other types of strategy research, perhaps because of the perception that prices are relatively easy to change and thus do not significantly commit the firm to a course of action. As a result, pricing decisions have not been considered as “strategic” decisions comparable to mergers and acquisitions, capacity expansions, new product launches, and related decisions requiring long-term commitments.

In reality, firm prices may be stickier than many have thought. Moreover, the range of price changes will likely be limited greatly by significant investments of a firm in production capabilities on the one hand, and in product design and advertising on the other hand. If we begin to look at pricing strategically, then it becomes an inherently multi-level link between firm decisions and market definition; as such, models of price changes could be developed to reflect multi-level explanatory frameworks (Besanko, Dranove & Shanley, 2001). Doing so will help us to begin viewing pricing as a strategic capability rather than as just an operating activity (Dutta, Zbaracki & Bergen, 2003).

SUMMARY This chapter made the case that research issues in strategic management are essentially all

problem focused, and that, to one extent or another, these problems usually span multiple levels of analysis. As such, they may align with different performance metrics and likely hold different performance implications from various perspectives—all of which may be important for strategy research. Most prior research has approached these issues from single perspectives, which in many cases may be problematic, especially in research concerned with firm performance issues such as competitive advantage and value creation.

This chapter discussed potential approaches for addressing this conflict. We also considered the different ways in which strategy explanations link levels of analysis. We explored the multi-level performance implications of two concepts central to strategic management: competitive advantage and value creation. Finally, we offered a variety of potential solutions through several different approaches for future research to consider when addressing multi-level issues.

ACKNOWLEDGMENTS We are grateful to the faculty and doctoral students in the Strategic Management group at

Purdue University’s Krannert School of Management for their informal input and comments on this project over the course of its development. We also wish to thank the audience of our presentation of an early version of this project at the Strategic Management Society’s 2004 annual conference, including session chair Tammy Madsen, and discussant David Hoopes, for their helpful comments. Finally, we also thank the editors, Fred Dansereau and Francis Yammarino, for providing us with the opportunity to develop these ideas in much greater depth and detail than most journals would allow.

Drnevich & Shanley 2005a.doc

Page 23 of 26

REFERENCES

Aldrich, H. (1999). Organizations evolving. London: Sage. Alchian, A., & Demsetz, H. (1972). Production, information costs, and economic organization. American

Economic Review, 62, 77–795. Andrews, K. (1971). The concept of corporate strategy. Homewood, IL: Irwin. Baldwin, C., & Clark, K. (2000). Design rules: The power of modularity. Cambridge, MA: MIT Press. Barnard, C. (1938). The functions of the executive. Cambridge, MA: Harvard University Press. Barney, J. (1986). Strategic factor markets: Expectations, luck, and business strategy. Management

Science, 32, 1231–1241. Baum, J., & Dutton, J. (Eds.) (1996). Advances in strategic management 1996: The embeddedness of

strategy (Vol. 13). Greenwich, CT: JAI Press. Bennis, W., & Nanus, B. (1985). Leaders: The strategies for taking charge. New York: Harper & Row. Besanko, D., Dranove, D., & Shanley, M. (2001). Exploiting a cost advantage and coping with a cost

disadvantage, Management Science, 47, 221–235. Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2004). Economics of strategy (3rd ed.) New

York: John Wiley & Sons. Blau, P. (1964). Exchange and power in social life. New York: John Wiley. Bower, J. (1970). Managing the resource allocation process. Boston: Harvard Graduate School of

Business Administration. Bowman, E., & Helfat, C. (2001). Does corporate strategy matter? Strategic Management Journal, 22(1),

1–24. Brandenburger, A., & Stuart, H. (1996). Value-based business strategy. Journal of Economics and

Management Strategy, 5, 5–24. Brush, T., & Bromiley, P. (1997). What does a small corporate effect mean? A variance components

simulation of corporate and business effects. Strategic Management Journal, 18(10), 825–835. Burgelman, R. (1983). Corporate entrepreneurship: Insights from a process study. Management Science,

29, 1349–1364. Burt, R. (1992). Structural holes: The social structure of competition. Cambridge, MA: Harvard

University Press. Camerer, C. (1985). Redirecting research in business policy and strategy. Strategic Management Journal,

6, 1–15. Campbell, D., & Stanley, J. (1963). Experimental and quasi-experimental designs for research. Boston:

Houghton Mifflin. Carroll, G., & Hannan, M. (2000). The demography of corporations and industries. Princeton, NJ:

Princeton University Press. Chandler, A. (1962). Strategy and structure. Cambridge, MA: MIT Press. Chandler, A. (1977). The visible hand. Cambridge, MA: Belknap. Chandler, A. (2001). Inventing the electronic century. New York: Free Press. Child, J. (1972). Organization structure, environment, and performance—The role of strategic choice.

Sociology, 6, 1–22. Coase, R. (1937). The nature of the firm. Econometrica, 4, 386–405. Coleman, J. (1990). Foundations of social theory. Cambridge, MA: Belknap. Collins, J. (2001). Good to great. New York: HarperBusiness. Cyert, R. M. & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall. Donaldson, G. & Lorsch, J. (1983). Decision making at the top. New York: Harper & Row. DiMaggio, P. (1994). Culture and economy. In N. Smelser & R. Swedberg (Eds.), The handbook of

economic sociology (pp. 27—57). Princeton, NJ: Princeton University Press. Dranove, D., Peteraf, M., & Shanley, M. (1998). Do strategic groups exist? An economic framework for

analysis. Strategic Management Journal, 19, 1029–1044. Dutta, S., Zbaracki, M., & Bergen, M. (2003). Pricing process as a capability: A resource-based

perspective. Strategic Management Journal, 24, 615–630. Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of Management Review, 14:

57-74. Emirbayer, M., & Goodwin, J. (1994). Network analysis, culture, and the problem of agency. American

Journal of Sociology, 99, 1411–1454.

Drnevich & Shanley 2005a.doc

Page 24 of 26

Fombrun, C., & Shanley, M. (1990). Reputation-building and corporate strategy. Academy of Management Journal, 33, 233–258.

Gabarro, J. (1985). When a new manager takes charge. Harvard Business Review, May–June, 110–123. Ghoshal, S., Hahn, M., & Moran, P. (2002). Management competence, firm growth, and economic

progress. In C. Pitelis (Ed.), The growth of the firm, the legacy of Edith Penrose (pp. 279–303). Oxford, UK: Oxford University Press.

Granovetter, M. (1985) Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91, 481–510.

Hannan, M. & Freeman, J. (1989). Organizational ecology. Cambridge, MA: Harvard University Press. Hayward, M., Rindova, V., & Pollock, T. (2004). Believing one’s own press: The causes and

consequences of CEO celebrity. Strategic Management Journal, 25, 637–653. Hermalin, B. (1998). Towards an economic theory of leadership: Leading by example. American

Economic Review, 88, 1188–1206. Hickson, D., Butler, R., Cray, D., Mallory, G., & Wilson, D. (1986). Top decisions: Strategic decision

making in organizations. San Francisco: Jossey-Bass. Hirsch, P. (1997). Review essay. Sociology without social structure, neoinstitutional theory meets Brave

New World. American Journal of Sociology, 102, 1702–1723. Jensen, M. & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and

ownership structure. Journal of Financial Economics, 3, 305-360. Kaplan, S., Mitchell, M., & Wruck, K. (2000). A clinical exploration of value creation and destruction in

acquisitions. In S. Kaplan (Ed.), Mergers and productivity (pp. 179–227). Chicago: University of Chicago Press.

Keegan, J. (2003). Intelligence in war: Knowledge of the enemy from Napoleon to Al-Qaeda. New York: Knopf.

Khanna, T., & Rivkin, J. (2001). Estimating the performance effects of business groups in emerging markets. Strategic Management Journal, 22, 45–74.

Kogut, B. (2000). The network as knowledge: Generative rules and the emergence of structure. Strategic Management Journal, 21, 405–425.

Kotter, J. (1982). The general managers. New York: Free Press. Kreps, D. (1990). Corporate culture and economic theory. In J. Alt & K. Shepsle (Eds.), Perspectives on

positive political economy. Cambridge, UK: Cambridge University Press. Laumann, E., & Knoke, D. (1987). The organizational state. Madison, WI: University of Wisconsin

Press. Levine, S., & White, P. (1961). Exchange as a conceptual framework for the study of interorganizational

relations. Administrative Science Quarterly, 5, 583–610. Lippman, S., & Rumelt, R. (2003). The payments perspective: Micro-foundations of resource analysis.

Strategic Management Journal, 24, 903–927. Lonergan, B. (1970). Insight: A study of human understanding. New York: Philosophical Library. Madhok, A. (2002). Reassessing the fundamentals and beyond: Ronald Coase, the transaction cost and

resource-based theories of the firm and the institutional structure of production. Strategic Management Journal, 23, 535–550.

March, J.G.& Simon, H.A. (1958), Organizations. New York: John Wiley. McGahan, A., & Porter, M. (1997). How much does industry matter, really? Strategic Management

Journal, 18, 15–30. McGahan, A., & Porter, M. (1999). The performance of U.S. corporations: 1981–1994. Journal of

Industrial Economics, 47, 373–398. Milgrom, P., & Roberts, J. (1988). Economic theories of the firm: Past, present, and future. Canadian

Journal of Economics, 21, 444–458. Miller, G. (1990). Managerial dilemmas: Political leadership in hierarchies. In Cook, K. and M. Levi

(eds.), The limits of rationality (pp. 324-347). Chicago: University of Chicago Press. Miller, C., Burke, L., & Glick, W. (1998). Cognitive diversity among upper-echelon executives:

Implications for strategic decision processes. Strategic Management Journal, 19, 39–58. Murtha, T., & Lenway, S. (1994). Country capabilities and the strategic state: How national political

institutions affect multinational corporations' strategies. Strategic Management Journal, 15, 113–130.

Drnevich & Shanley 2005a.doc

Page 25 of 26

Oliver, C. (1997). Sustainable competitive advantage: Combining institutional and resource-based views. Strategic Management Journal, 18, 697–713.

Penrose, E. (1959). The theory of the growth of the firm. Oxford, UK: Oxford University Press. Penrose, E. (1960). The growth of the firm—A case study, the Hercules Power Company. Business

History Review, 34, 1–23. Penrose, P., & Pitelis, C. (2002). Edith Elura Tilton Penrose: Life, contribution, and influence. In C.

Pitelis (Ed.), The growth of the firm: The legacy of Edith Penrose (pp. 17–36). Oxford, UK: Oxford University Press.

Peteraf, M. (1993). The cornerstones of competitive advantage: A resource based view. Strategic Management Journal, 14, 179–191.

Pfeffer, J. (1987). A resource dependence perspective on intercorporate relations. In M. S. Mizruchi & M. Schwartz (Eds.), Intercorporate relations: The structural analysis of business (pp. 25–55). Cambridge, UK: Cambridge University Press.

Pfeffer, J., & Salancik, G. (1978). The external control of organizations. New York: Harper & Row. Phillips, A. (1960). A theory of interfirm organization. Quarterly Journal of Economics, 74, 602–613. Porter, M. (1980). Competitive strategy. New York: Free Press. Porter, M. (1985). Competitive advantage. New York: Free Press. Porter, M. (1987). From competitive advantage to corporate strategy. Harvard Business Review, 65, 43–

59. Powell, T. (2001). Competitive advantage: Logical and philosophical considerations. Strategic

Management Journal, 22, 875–888. Priem, R., & Butler, J. (2001). Is the resource-based view a useful perspective for strategic management

research? Academy of Management Review, 26, 22–41. Ravenscraft, D., & Scherer, F. (1987). Mergers, sell-offs, and economic efficiency. Washington, DC:

Brookings Institution. Richardson, G. (1972). The organization of industry. Economic Journal, 883–896. Ruefli, T., & Wiggins, R. (2003). Industry, corporate, and segment effects and business performance: A

non-parametric approach. Strategic Management Journal, 24, 861–880. Rumelt, R. (1991). How much does industry matter? Strategic Management Journal, 12, 167–185. Schmalensee, R. (1985). Do markets differ much? American Economic Review, 75, 341–351. Schnatterly, K. (2003). Increasing firm value through detection and prevention of white-collar crime.

Strategic Management Journal, 24(7), 587–614. Scott, W. (2001). Institutions and organizations (2nd ed.). Thousand Oaks, CA: Sage. Seth, A. (1990). Sources of value creation in acquisition: An empirical investigation, Strategic

Management Journal, 11( 6) 431-446. Seth, A. & H. Thomas (1994). Theories of the Firm: Implications for Strategy Research. Journal of

Management Studies, 31(2):165-191. Shamsie, J. (2003). The context of dominance: An industry-driven framework for exploiting reputation.

Strategic Management Journal, 24, 199–216. Shanley, M., & Correa, M. (1992). Perceived versus actual agreement in acquisition integration. Strategic

Management Journal, 13, 245–266. Short, J., Palmer, T., & Ketchen, D. (2003). Multilevel influences on firm performance: Insights from the

resource-based view and strategic groups research. In F. Dansereau & F. Yammarino (Eds.), Research in multilevel issues (Vol. 2, pp. 155–187). New York: JAI Press.

Silverman, B. (1999). Technological resources and the direction of corporate diversification: Toward an integration of the resource-based view and transaction cost economics. Management Science, 45, 1109–1124.

Sirower, M. (1997). The synergy trap. New York: Free Press. Spulber, D. (1994). Economic analysis and management strategy: A survey continued. Journal of

Economics and Management Strategy, 3, 355–406. Spulber, D. (2003). Management strategy. New York: McGraw-Hill/Irwin. Sutcliffe, K., & Zaheer, A. (1998). Uncertainty in the transaction environment: An empirical test.

Strategic Management Journal, 19, 1–23. Sutton, J. (1992). Sunk costs and market structure. Cambridge, MA: MIT Press. Thompson, J. (1967). Organizations in action. New York: McGraw-Hill.

Drnevich & Shanley 2005a.doc

Page 26 of 26

Waddock, S., & Graves, S. (1997). The corporate social performance–financial performance link. Strategic Management Journal, 18, 303–319.

Welch, J. (2001). Jack: Straight from the gut. New York: Warner-Business. Wernerfelt, B. (1984). The resource based view of the firm. Strategic Management Journal, 5, 171–180. Wernerfelt, B., & Montgomery, C. (1988). Tobin’s Q and the importance of focus in firm performance.

American Economic Review, 78, 246–250. Willer, D. (1999). Network exchange theory. Westport, CT: Praeger. Williamson, O. (1975). Markets and hierarchies. New York: Free Press. Williamson, O. (1985). The economic institutions of capitalism. New York: Free Press. Williamson, O. (1999). Strategy research: Governance and competence perspectives. Strategic

Management Journal, 20, 1087–1108. Zajac, E., & Bazerman, M. (1991). Blind spots in strategic decision making: The case of competitor

analysis. Academy of Management Review, 16, 37–56.