The model by Phillips, Chang, and Buzzell revisited – the effects of unobservable variables

doi:10.1017/CBO9780511488726.008

7 - The model by Phillips, Chang, and Buzzell revisited – the effects of unobservable variables

Published online by Cambridge University Press: 22 September 2009

Lutz Hildebrandt and

Dirk Temme

Edited by

Paul W. Farris and

Michael J. Moore

Show author details

Lutz Hildebrandt: Affiliation:
Professor of Marketing and Director of the Institute of Marketing Humboldt University of Berlin; President European Marketing Academy
Dirk Temme: Affiliation:
Assistant Professor of Marketing Humboldt University of Berlin
Paul W. Farris: Affiliation:
University of Virginia
Michael J. Moore: Affiliation:
University of Virginia

Book contents

Get access

Summary

This chapter reviews some key hypotheses from empirical research on success factors in marketing. These hypotheses on drivers of business profitability, in particular quality and market share, have been a major subject of critique, and these critiques have come primarily from the resource-based view in management research. According to this perspective, general laws of business success based on manageable strategic input factors do not exist. Instead, unobservable, firm-specific variables are regarded as the key drivers of profitability. However, only a few studies have been able to show that strong relations discovered in empirical success factor research disappear if unobservable variables are controlled in econometric models.

In this chapter, we show that some of these results may be methodological artifacts. Based on the hypotheses of Phillips, Chang, and Buzzell (1983) regarding the effects of quality and market share on profitability, we use PIMS data to replicate their study using a modified modeling approach. Whereas Phillips, Chang, and Buzzell use data taken at two points in time to investigate the relationships between some key variables, this chapter uses a six-year cross-section of time series and a panel modeling approach to estimate the parameters. This approach allows us to overcome some major objections to the traditional PIMS approach; key relations between observable success factors and profitability highlighted by the PIMS research can be estimated while simultaneously the effects of different types of unobservable firm-specific factors can be controlled.

Type: Chapter
Information: The Profit Impact of Marketing Strategy Project
Retrospect and Prospects
, pp. 153 - 187

DOI: https://doi.org/10.1017/CBO9780511488726.008 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Book purchase

Temporarily unavailable

References

Ailawadi, K. L., P. W. Farris, and M. E. Parry. 1993. “Market Share and ROI: A Peek at Some Unobserved Variables.” Technical working paper. Marketing Science Institute, Cambridge, MA

Ailawadi, K. L., Farris, P. W., and Parry, M. E.. 1999. “Market Share and ROI: Observing the Effect of Unobserved Variables.” International Journal of Research in Marketing 16: 17–33CrossRef Google Scholar

Annacker, D., and Hildebrandt, L.. 2004. “Unobservable Effects in Structural Models of Business Performance.” Journal of Business Research 57: 507–517CrossRef Google Scholar

Bagozzi, R. P., and H. Baumgartner. 1994. “The Evaluation of Structural Equation Models and Hypothesis Testing.” In R. P. Bagozzi, ed. Principles of Marketing Research, 386–422. Cambridge, MA: Basil Blackwell

Baltagi, B. H. 2001. Econometric Analysis of Panel Data, 2nd edn. Chichester: John Wiley

Barney, J. B. 1986. “Strategic Factor Markets: Expectations, Luck, and Business Strategy.” Management Science 32: 1231–1241CrossRef Google Scholar

Barney, J. B. 1991. “Firm Resources and Sustained Competitive Advantage.” Journal of Management 17: 99–120CrossRef Google Scholar

Boulding, W. 1990. “Unobservable Effects and Business Performance: Do Fixed Effects Matter?” Marketing Science 9: 88–91CrossRef Google Scholar

Boulding, W. 1992. “Market-Driven Quality?” Working Paper No. 92–007, Wharton/PIMS Research Center, University of Pennsylvania

Boulding, W., and Staelin, R.. 1990. “Environment, Market Share, and Market Power.” Management Science 36: 1160–1177CrossRef Google Scholar

Boulding, W., and Staelin, R.. 1993. “A Look on the Cost Side: Market Share and the Competitive Environment.” Marketing Science 12: 144–166CrossRef Google Scholar

Bound, J., Jaeger, D. A., and Baker, R. M.. 1995. “Problems With Instrumental Variables Estimation When the Correlation Between the Instruments and the Endogenous Explanatory Variable is Weak.” Journal of the American Statistical Association 90: 443–450Google Scholar

Browne, M. W., and R. Cudeck. 1993. “Alternative Ways of Assessing Model Fit.” In K. A. Bollen and J. S. Long, eds. Testing Structural Equation Models, 136–162. Newbury Park, CA: Sage Publications

Buzzell, R. D. 1990. “Commentary on ‘Unobservable Effects and Business Performance’.” Marketing Science 9: 86–87CrossRef Google Scholar

Buzzell, R. D., and B. T. Gale. 1987. The PIMS Principles: Linking Strategy to Performance. New York: The Free Press

Camerer, C. F., and L. Fahey. 1988. “The Regression Paradigm: A Critical Appraisal and Suggested Directions.” In J. Grant, ed. Strategic Management Frontiers, 443–459. Greenwich, CT: JAI Press

Charnes, A., Cooper, W. W., and Rhodes, E.. 1978. “Measuring the Efficiency of Decision Making Units.” European Journal of Operational Research 2: 429–444CrossRef Google Scholar

Chen, F., Bollen, K. A., Paxton, P., Curran, P. J., and Kirby, J. B.. 2001. “Improper Solutions in Structural Equation Models.” Sociological Methods and Research 29: 468–508CrossRef Google Scholar

Farris, P. W., Parry, M. E., and Ailawadi, K. L.. 1992. “Structural Analysis of Models with Composite Dependent Variables.” Marketing Science 11: 76–94CrossRef Google Scholar

Fine, C. H. 1986. “Quality Improvement and Learning in Productive Systems.” Management Science 32: 1301–1315CrossRef Google Scholar

Garvin, D. A. 1988. Managing Quality. New York: Macmillan

Ghemawat, P. 1991. Commitment: The Dynamic of Strategy. New York: Free Press

Grant, R. M. 1991. “The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation.” California Management Review 33: 114–135CrossRef Google Scholar

Griliches, Z. 1974. “Errors in Variables and Other Unobservables.” Econometrica 42: 971–998CrossRef Google Scholar

Hausman, J. A. 1978. “Specification Tests in Econometrics.” Econometrica 46: 1251–1271CrossRef Google Scholar

Hildebrandt, L., and Annacker, D.. 1996. “Panelanalysen zur Kontrolle ‘unbeobachtbarer’ Einflussgrössen in der Erfolgsfaktorenforschung.” Zeitschrift für Betriebswirtschaft 66: 1409–1426Google Scholar

Hildebrandt, L., and R. Buzzell. 1991. “Product Quality, Market Share, and Profitability: A Causal Modeling Approach.” Harvard Business School Working Paper #91–045

Hsiao, C. 1986. Analysis of Panel Data. Cambridge: Cambridge University Press

Hu, L., and Bentler, P. M.. 1998. “Fit Indices in Covariance Structure Modeling: Sensitivity to Underparameterized Model Misspecification.” Psychological Methods 3: 424–453CrossRef Google Scholar

Hu, L., and Bentler, P. M.. 1999. “Cutoff Criteria for Fit Indexes in Covariance Structure Analysis: Conventional Criteria versus New Alternatives.” Structural Equation Modeling 6: 1–55CrossRef Google Scholar

Jacobson, R. 1988. “Distinguishing Among Competing Theories of the Market Share Effect.” Journal of Marketing 52 (October): 68–80CrossRef Google Scholar

Jacobson, R. 1990. “Unobservable Effects and Business Performance.” Marketing Science 9: 74–85CrossRef Google Scholar

Jacobson, R., and Aaker, D.. 1985. “Is Market Share All That It's Cracked Up To Be?” Journal of Marketing 49 (Fall): 11–22CrossRef Google Scholar

Jacobson, R., and Aaker, D.. 1987. “The Strategic Role of Product Quality.” Journal of Marketing 51 (October): 31–44CrossRef Google Scholar

Jöreskog, K. G. 1978. “An Econometric Model for Multivariate Panel Data.” Annales de l'INSEE 30–31: 355–366CrossRef Google Scholar

Jöreskog, K. G., and D. Sörbom. 1996. LISREL 8: User's Reference Guide. Chicago: Scientific Software

Lillard, L. A., and Willis, R. J.. 1978. “Dynamic Aspects of Earning Mobility.” Econometrica 46: 985–1012CrossRef Google Scholar

Mundlak, Y. 1978. “On the Pooling of Time Series and Cross Section Data.” Econometrica 46: 69–85CrossRef Google Scholar

Penrose, E. T. 1959. The Theory of the Growth of the Firm. New York: Wiley

Peteraf, M. A. 1993. “The Cornerstones of Competitive Advantage: A Resource-Based View.” Strategic Management Journal 14: 179–191CrossRef Google Scholar

Phillips, L. W., Chang, D. R., and Buzzell, R. D.. 1983. “Product Quality, Cost Position and Business Performance: A Test of Some Key Hypotheses.” Journal of Marketing 47 (Spring): 26–43CrossRef Google Scholar

Rumelt, R. P., and R. Wensley. 1980. “In Search of the Market Share Effect.” University of California Working Paper MGL-61

Rumelt, R. P., Schendel, D., and Teece, D. J.. 1991. “Strategic Management and Economics.” Strategic Management Journal 12: 5–29CrossRef Google Scholar

Staiger, D., and Stock, J. H.. 1997. “Instrumental Variables Regression With Weak Instruments.” Econometrica 65: 557–586CrossRef Google Scholar

Teece, D. J., Pisano, G., and Shuen, A.. 1997. “Dynamic Capabilities and Strategic Management.” Strategic Management Journal 18: 509–5333.0.CO;2-Z>CrossRef Google Scholar

Wernerfelt, B. 1984. “A Resource-Based View of the Firm.” Strategic Management Journal 5: 171–180CrossRef Google Scholar