Determinants of-WPS Office

Determinants of Firm Performance
Gary Hansen, a macroeconomist at UCLA is known for creating the theory of
indivisible labor. Hansen and a fellow colleague, Birger Wernerfelt, were also known for
an article called “Determinants of Firm Performance: The Relative Importance of
Economic and Organizational Factors” which was published in the Strategic
Management Journal. It’s a great article to read when trying to learn more about
managerial economics. The article is primarily about what determines firm performance
when emphasizing external market factors, as well as building on the behavioral and
sociological paradigm to see what factors determine success. According to Hansen and
Wernerfelt, they “construct and test three models of firm performance, first an example
from an economic perspective, second an example from an organizational perspective,
and the third an integration of the other two” (p399). So starting with the first model they
discuss what the major determinants of firm level profitability are. They are as follows:
characteristics of the industry in which the firm competes, the firm’s position relative to
its competitors and the quantity or quality of the firm’s resources. They used many
models at the firm and industry levels. The industry variables they found included:
growth concentration, capital intensity, and advertising intensity. Hansen and
Wernerfelt said, “A recent study by Schmalensee (1985) shows that differences
between industries as measured by average industry return on assets account for
almost all the explained variance in business unit performance” (p400). The remaining
variables that show firm performance are from the firm. One of the variables they used
was firm size.
Next they discussed the organizational model of firm performance. Many studies
have shown how changes in organizational structures and systems have altered
individual performance. The traditional model of an organizational climate is made up of
environmental, social, and organizational factors. The organizational climate then

results in how individuals behave/perform, and from that companies can see the
organizational performance.
In the organizational model, they found the same industry variables such as
growth rate, concentration, and barriers. To figure out the firms competitive position
they used the firms market share, and at the firm level they used the firm size so it was
pretty similar to the first model. After they integrated the two models of firm performance, they were
able to confirm the importance and independence of both
factors affecting firm performance.
3.4 The Economics of Managing
Roy Radner, a micro-economic theorist who is known for the Radner equilibrium,
wrote an article called “Hierarchy: The Economics of Managing” which was published in
the Journal of Economic Literature. This article talks about how important managing
has become in society. Radner mentioned at the beginning that back when Alfred
Marshall wrote the Principles of Economics that the typical firm in the United States was
small and was ran by an owner and maybe a few assistants whereas today we have
businesses like General Motors which have about a third of their employees in
management positions. This shows just how important the concept of management has
gotten over that period of time. Radner discusses “the sense in which the large
business enterprise is a small economy (and sometimes not so small), and the central
role of managing in that economy” (p1383). He says how important it is for
management to become an activity worthy of economic analysis. Since the
management sector of the firm makes so many different decisions it is important for the
information to be decentralized. Decentralized information allows for all the decisions to
be made to be based on all the observations. To put it simply, different decision makers
will usually have different information and therefore will make different decisions. So
the efficient decentralization of information is important. In a large firm, it is useful to

divide activities between managing and doing. Radner used the term managing instead
of management because they mean different things.

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Determinants of Firm Performance

Gary Hansen, a macroeconomist at UCLA is known for creating the theory of

an article called “Determinants of Firm Performance: The Relative Importance of

Economic and Organizational Factors” which was published in the Strategic

from an economic perspective, second an example from an organizational perspective,

growth concentration, capital intensity, and advertising intensity. Hansen and

Wernerfelt said, “A recent study by Schmalensee (1985) shows that differences

between industries as measured by average industry return on assets account for

was firm size.

individual performance. The traditional model of an organizational climate is made up of

environmental, social, and organizational factors. The organizational climate then

factors affecting firm performance.

3.4 The Economics of Managing

role of managing in that economy” (p1383). He says how important it is for

management to become an activity worthy of economic analysis. Since the

information to be decentralized. Decentralized information allows for all the decisions to

the efficient decentralization of information is important. In a large firm, it is useful to

of management because they mean different things.

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