A Simultaneous Equation Model of Corporate Strategy

Abstract

Over the past decade strategy has become a concept of value to management as it relates the firm to the threats and opportunities of an increasingly turbulent environment. However, empirical tests of the validity of the strategy construct have been limited, as have been the managerial applications of the models used to test the construct. Early research efforts, both analytical and empirical, have shown that quantitative modeling of strategy could be a tool of value in helping top management achieve the goal is of the firm [Gershefski, George W. 1969. Building a corporate financial model. Harvard Business Rev. (July–August) 61–72; Guth, W. D. 1972. Product differentiation and concentration in the brewing industry. J. Business Policy. 2 (3) 31–36.]. Prior research has been limited to single equation models linking strategy and environment to only one performance goal, profitability. While there is some controversy about it, complex organizations set multiple, and sometimes conflicting goals, creating a need for models that car; encompass more than a single performance goal. Moreover, the interactive effects of strategic variables governing the efficiency of daily operations, suggests that single equation models of strategy cannot capture the complexity of the modern firm. This research explores the use of a simultaneous equation model of corporate strategy as a means of overcoming the multiple performance goal problem, while capturing the complex patterns of the strategic, operating, and environmental variables that influence goal achievement. The difficulties of estimating the model, including the problems of sample heterogeneity so important to this type of work, are identified and discussed using data and results taken from the U.S. brewing industry.

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