SCP-relevance and class-effect in performance – A comparative analysis of restaurants and petroleum firms

Abstract

The importance of industry-specific factors for a firm's performance has often attracted the attention of researchers, managers, and investment analysts. This research uses random-effect variance component analysis to examine the relevance of structure-conduct-performance (SCP) paradigm in the context of restaurant and petroleum/natural gas firms. The study further investigates class-effect in firm performance by analyzing whether the relative importance of industry-and-firm-level effects varies across different performance groups. Results suggest a direct relevance of the SCP paradigm and industry-specific factors for firm performance, and a distinct dominance of industry-effect over firm-effect regardless of the choice of accounting or value based performance measures. Results further reveal varying roles of industry and firm-level factors (corporate or strategic) across middle-of-the road and non-average (exceptional) performance groups. As such the importance of SCP paradigm and the strategic role of both industry-and-firm effect factors for value creation in US based restaurant firms is better understood.

Introduction

Predicting a firm's performance and identifying proper performance measures and performance determinants have been frequent concerns of Wall Street analysts, management experts and business researchers (Rumelt et al., 1994). Traditional industrial organization (IO) economists and their structure-conduct-performance (SCP) paradigm argued that industry characteristics influence a firm's performance (Mason, 1939, Bain, 1956, Mann, 1966). On the other hand, resource-based view (RBV) experts argued that a firm's resources, attributes, and actions are driving forces for performance (Wernerfelt, 1984, Barney, 1991). After Schmalensee (1985) and Rumelt (1991), many researchers further explored the relative influence of industry structure and firm-specific resources on a firm's performance. McGahan and Porter (1997), Bowman and Helfat (2001), and Brush and Bromiley (1997) identified industry and firm-level influences using random and fixed effect models. Hough (2006), McGahan and Porter (2003), and Brush et al. (1999) modeled the relationships between industry and firm effects, acknowledging the nested nature of these effects.

Within the realm of hospitality, very few researchers addressed the role of the SCP paradigm for explaining a firm's performance. Tavitiyaman et al. (2011), Chatoth and Olsen, 2005, Chatoth and Olsen, 2007, and Wong and Song (2006) addressed the role of environment and industry on hotel and restaurant performance. Tse (1991) and West and Anthony (1990) emphasized the importance of environment and organizational structure for the financial performance of restaurants. Despite some researchers’ examination of the relevance of the SCP paradigm in the context of lodging firms (Davies and Downward, 1996, Davies, 1999, Pan, 2005), none explored the issue of SCP relevance for explaining the performance variances among restaurants or the class-effect in such variance that separates value-leading restaurants from inferior or average, middle-of-the-road firms. The current investigation addresses the previous deficiency in existent literature by testing the relevance of the SCP paradigm in the context of superior, average, and inferior performing restaurant firms. The restaurant industry provides an ideal setting to test the SCP paradigm given its unique structural elements (smaller barriers to entry, greater degree of horizontal and vertical product differentiation, soft supply constraints), basic conditions (such as product perishability and labor intensity, high turnover) and stronger vulnerability to economic fluctuations (including high failure rate). The expectation is that the findings of this research should contribute to improving the understanding of performance measurement, and enable financial analysts and hospitality experts to formulate more comprehensive and robust value- based performance forecasting models for restaurants.

This study revisits the subject of SCP relevance and industry- and firm-level influences on a firm's profitability and equity value using methodological modifications, enhanced performance measures, and the restaurant industry's data along with crude petroleum and natural gas industry as a control industry group with its contrasting industry structure (for example, significantly larger barriers to entry and capital investments, and much smaller degree of horizontal and vertical differentiation in products). The examination considers the relative importance of industry- and firm-level influence using a random-effect variance composition approach and firm-based cluster solutions obtained from a two-stage cluster analysis (Ketchen and Shook, 1996). In contrast to traditional approaches of Rumelt (1991), Schmalensee (1985), and McGahan and Porter (1997), the current study uses multiple measures of a firm's performance that are both value-based (economic profits per dollar capital employed and total market value per dollar capital employed) and accounting-based (return on assets and return on equity). Research results show that both industry and firm-specific factors significantly influence the overall profitability and equity value of restaurant firms. Such effects are significant regardless of the choice of accounting- or value-based measures. Results of this research further show that the relative importance of such effects varies across exceptional value-creating firms and middle-of-the road firms within the US based restaurant industry.