Using the Shapley value approach to variance decomposition in strategy research: Diversification, internationalization, and corporate group effects on affiliate profitability
File(s)
Published version
Author(s)
Sharapov, Dmitry
Kattuman, Paul
Rodriguez, Diego
Velazquez, F Javier
Type
Journal Article
Abstract
Research Summary
Variance decomposition methods allow strategy scholars to identify key sources of heterogeneity in firm performance. However, most extant approaches produce estimates that depend on the order in which sources are considered, the ways they are nested, and which sources are treated as fixed or random effects. In this paper, we propose the use of an axiomatically justified, unique, and effective solution to this limitation: the “Shapley Value” approach. We show its effectiveness compared to extant methods using both simulated and real data, and use it to explore how the importance of business group effects varies with group diversification and internationalization in a large, representative sample of European firms. We thus demonstrate the method's superior accuracy and its usefulness in asking and answering new questions.
Managerial Summary
A key contribution of strategic management research to managerial practice is identifying drivers of firm performance that operate at firm, corporation, industry, and national levels. A branch of this research measures the relative importance of factors at these different levels in producing variation in firm performance, thus helping top managers focus efforts on aspects of their businesses most likely to yield performance differences. However, estimates produced by extant methods are sensitive to method used, and to modeling choices made. This paper proposes the use of the “Shapley Value” approach, which is free from such sensitivity, shows its effectiveness compared to extant methods, and uses it to explore how the importance of factors at the level of the business group varies with group diversification and internationalization.
Variance decomposition methods allow strategy scholars to identify key sources of heterogeneity in firm performance. However, most extant approaches produce estimates that depend on the order in which sources are considered, the ways they are nested, and which sources are treated as fixed or random effects. In this paper, we propose the use of an axiomatically justified, unique, and effective solution to this limitation: the “Shapley Value” approach. We show its effectiveness compared to extant methods using both simulated and real data, and use it to explore how the importance of business group effects varies with group diversification and internationalization in a large, representative sample of European firms. We thus demonstrate the method's superior accuracy and its usefulness in asking and answering new questions.
Managerial Summary
A key contribution of strategic management research to managerial practice is identifying drivers of firm performance that operate at firm, corporation, industry, and national levels. A branch of this research measures the relative importance of factors at these different levels in producing variation in firm performance, thus helping top managers focus efforts on aspects of their businesses most likely to yield performance differences. However, estimates produced by extant methods are sensitive to method used, and to modeling choices made. This paper proposes the use of the “Shapley Value” approach, which is free from such sensitivity, shows its effectiveness compared to extant methods, and uses it to explore how the importance of factors at the level of the business group varies with group diversification and internationalization.
Date Issued
2021-03-01
Date Acceptance
2020-08-26
Citation
Strategic Management Journal, 2021, 42 (3), pp.608-623
ISSN
0143-2095
Publisher
Wiley
Start Page
608
End Page
623
Journal / Book Title
Strategic Management Journal
Volume
42
Issue
3
Copyright Statement
© 2020 The Authors. Strategic Management Journal published by John Wiley & Sons Ltd.
This is an open access article under the terms of the Creative Commons Attribution License http://creativecommons.org/licenses/by/4.0/, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
This is an open access article under the terms of the Creative Commons Attribution License http://creativecommons.org/licenses/by/4.0/, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
License URL
Identifier
https://onlinelibrary.wiley.com/doi/10.1002/smj.3236
Subjects
Social Sciences
Business
Management
Business & Economics
corporate group
diversification
internationalization
Shapley value regression
variance decomposition
BUSINESS SEGMENT PERFORMANCE
SUBNATIONAL REGION MATTER
RELATIVE IMPORTANCE
COORDINATION COSTS
DOMINANCE ANALYSIS
FIRM PERFORMANCE
INDUSTRY
MARKETS
PREDICTORS
COMPONENTS
Business & Management
1503 Business and Management
1505 Marketing
Publication Status
Published
Article Number
smj.3236
Date Publish Online
2020-09-01