Strategic Management Journal, Vol. 18(Summer Special Issue), 15-30(1997) HOW MUCH DOES INDUSTRY MATTER. REALLY? ANITA M. McGAHAN* and MICHAEL E. PORtER etts. School of Business Administration, Harvard University, Boston, Massa importance of year, industry, corporate-parent, and business- ategories. Our results indi fects account for 2 percent, 19 percent, 4 percent, and 32 percent, respectively, of the variance in profitabili substantially across broad economic sectors. Industry effects account for a smaller portion of profit variance in manufacturing but a larger portion in lodging/entertainment, services, wholesale/retail trade, and transportation, Across all sectors we find a negati between corporate-parent and industry effects. A detailed analysis suggests that industry. rporate-parent, and business-specific effects are related in complex ways, @1997 by John Wiley sons, Ltd Debate in strategy has long focused on the performance has received scant empirical study sources of performance differences among firms. reflecting both the unavailability of data and chal In the research growing out of the industrial- lenging statistical difficulties. Rumelt(1991)is organization tradition, industry structure is a cen- perhaps the most influential study. Rumelt's tral determinant of firm performance, and firm research followed methods introduced by Schma differences are considered against an industry lensee (1985)for disaggregating business-unit background. More recently, a line of thought profits into components associated with industry sometimes called the resource-based view argues effects, corporate-parent effects, and market-share that firm performance is most influenced by effects. Neither Rumelt(1991) nor Schmalensee unique organizational processes. Under this view, (1985) made claims about the economic or industry structure is less important than idiosyn- organizational processes underlying their results cratic historical factors giving rise to firm differ- both papers were descriptive rather than norma- ences tive. Nevertheless some have interpreted Rumelt's Despite the importance of these questions, the finding of low stable industry effects to support relative influence of firm and industry effects on the resource-based view In this paper, we revisit the influence of indus ry, business-specific, and corporate-parent influ Key words: profit components, firm performance, ences on profitability using comprehensive data ndustry effects and enhanced statistical methods We examine Conespondenne to: ian itH M, Md ane radsatd iech oileldfr the relative effects of these influences on prof Boston MA 02163, U.S.A itability the econe whole as Porter(1980) and Oster (1990)are in the industrial-organi. in broad economic sectors. Finally, we begin to (1991), Dierickx and Cool (1989a, 1989b), and Barney (1986,1989) For example, see Levinthal (1995: 20). CCC0143-2095/97/S10015-16$1750