How much does the firm's alliance network matter?

Pankaj Kumar, Xiaojin Liu, Akbar Zaheer

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

Abstract

Research Summary: Extant empirical work partitioning the variance in firm (business segment) profitability has identified industry, corporate parent, business segment, and time as key sources. However, this variance decomposition research stream has treated firms as atomistic, autonomous entities. We employ a fast-unfolding community-detection algorithm to detect firms' network memberships and use the Shapley Value method to isolate the effect of the firm's alliance network, in addition to industry, corporate parent, business segment, and year effects, on the variance in business unit performance. Our findings demonstrate that the effect of the firm's alliance network explains 11% of the variance in firm ROA among 16,381 business segments from 1979 through 1996. We also extend the time period through 2018 and find that our results broadly hold. Managerial Summary: In the search for superior firm performance, managers typically focus their attention externally on profitable industries in which to operate, as well as internally on their firms' idiosyncratic and valuable resources and capabilities. In addition to these profitability sources, our work suggests another important, but heretofore overlooked, factor in the managerial quest for competitive advantage: the value-creating potential of alliance networks. We employ a machine-learning algorithm to detect firms' network memberships. Our findings indicate that as much as 11% of the variance in firm profitability (ROA) is explained by the network of alliances of which the firm is a part. Our study also implies that the emphasis on networks continues to be relevant in a technology age in which industry boundaries are blurring.

Original languageEnglish (US)
Pages (from-to)1433-1468
Number of pages36
JournalStrategic Management Journal
Volume43
Issue number8
DOIs
StatePublished - Aug 2022

Bibliographical note

Funding Information:
We are most grateful for valuable feedback from Anita McGahan, Harbir Singh, and Tom Brush on earlier versions of this work. We thank Associate Editor Andrew Shipilov for his excellent guidance and the two anonymous reviewers whose critical comments helped further strengthen the paper. All errors are ours.

Publisher Copyright:
© 2022 The Authors. Strategic Management Journal published by John Wiley & Sons Ltd.

Keywords

  • Shapley value
  • community detection
  • firm profitability
  • network effects
  • variance decomposition

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