Unobservable Effects and Business Performance

Abstract

While “unobservable” factors such as corporate culture, access to scarce resources, management skill, and luck can be postulated to be principal determinants of business success, their effects are all but ignored in studies of business performance. This study, making use of the PIMS data base, reports empirical evidence indicating that failure to control for unobservable factors influencing profitability both biases and exaggerates the effect of strategic factors. Indeed, the influence of unobservable factors is so pervasive as to invalidate many of the conclusions drawn from studies failing to control for their effects.