Academic journal article Journal of Business Strategies

The Impact of Strategy, Industry and Culture on Forecasting the Performance of Global Competitors: A Strategic Perspective

Academic journal article Journal of Business Strategies

The Impact of Strategy, Industry and Culture on Forecasting the Performance of Global Competitors: A Strategic Perspective

Article excerpt

Abstract

This study examines how business strategy, industry competitive environment and national culture affect the accuracy and level of agreement among financial analysts who predict the future earnings of international competitors. Recent research has reported the increasing importance played by financial analysts regarding the stock price and market value of firms. Analysts' forecasts of performance have been found to significantly affect the cost of capital, valuation and stock price changes of firms. As the incidence of cross-national mergers and acquisitions continues to escalate, understanding factors that systematically affect performance predictions becomes increasingly important, especially for firms employing cross-national merger or acquisition strategies. We find that business strategies affect the accuracy of analysts' performance estimates while national culture plays an important role in determining the level of agreement among analysts' predictions. Implications and plans of action for international management practitioners and researchers are discussed.

Background

Strategic management seeks to integrate the traditional functionally-related business fields, such as economics, finance, marketing and accounting, by focusing on top management decisions having long-term impact on the future success of the firm (Andrews, 1987; Porter, 1985). The most commonly cited factor linking strategic management with these fields is the financial outcome of the firm. Describing how "strategic" factors focus on the external environment of the firm and affect the performance of the firm was the starting point for early models in strategic management (Hofer, 1975). For example, Porter's (1980) well-known model of competition serves as a basis for assessing the relative impact that key external factors, such as buyers, suppliers and rivals, have on competition within a particular industry. Thus, strategic management historically sought to address how contingent factors from the firm's external environment, and resulting decisions made within the firm, systematically affected financial performance of head-to-head competitors (Jauch, Osborn & Glueck, 1980).

More recently, research in strategic management (Venkatraman & Ramanujam, 1986), behavioral finance (Olsen, 1998) and financial accounting (Das, Levine & Sivaramakrishnan, 1998; Shipper, 1991; and Dreman & Berry, 1995) has attempted to expand our understanding of the factors affecting the prediction of future firm performance, with particular emphasis on the accuracy of indicators predicting future firm performance. This interest is increasing in importance as a strategic focus because understanding the factors affecting the accuracy of the firm's future earnings is key to understanding the firm's future valuation, cost of capital and the relationship between earnings and stock prices (Brown & Rozeff, 1978). That is, factors affecting the accuracy of performance predictors have a direct impact on the strategic alternatives available to firm managers. Market valuation, stock price and cost of capital affect management's ability to implement broad competitive strategies, such as expanding the firm through mergers or acquisitions (Barton & Gordon, 1988). Successful mergers and acquisitions are based on securing cost-effective capital through debt or equity markets (Abolafia, 1996; Shefrin & Statman, 1993).

The potential implication for effective management of the firm is significant. By understanding factors affecting financial analysts' predictions of future firm performance, related changes in stock prices can be anticipated by managers and investors thus limiting the potentially negative impact of unexpected changes in firm valuation (Rivera, 1991). For example, Mann (1998) recently reported the single-day 24 percent market value decline of one company attributable to differences between financial analysts' estimates of the firm's earnings and the announcement by management of actual earnings. …

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