168 R. P. Rumelt include components for overall bu cycle profitability is unrelated to ffects, stable and transient industry effects, as effects. While industry differences matter, they well as stable and transient business-unit effects. 2 are clearly not all that matters. If this intra- Like Schmalensee, I find that corporate effects industry variance is due to transient disequilib are negligible. However, I draw dramatically rium phenomena, then the 'classical focus on different conclusions about the importance of industry'would still be a contender; although it industry effects, the existence and importance of explains only 8 percent of the variance, it would business-level effects, and the validity of industry- be the only stable pattern in the data. But, if a level analysis large portion of the intra-industry variance is due The me raightforward ble differeng analysis is to start with what Schmalensee's results industries, then the 'classical focus on industry' left undecided. The first major incertitude is that, may be misplaced although 20 perce usiness-unit returns explained by industry effects, we do not know In this study, I find that the majority of this industry effects rather than to transient phena a how much of this 20 percent is due to sta residual variance is due to stable long-term diferences among business-units rather than ena. For example, in 1975 the return on assets to transient phenomena. Using Schmalensee's of the passenger automobile industry was 6.9 sample, I find that stable business-unit effects percent and that of the corn wet milling industry account for 46 percent of t e variance. Indeed was 35 percent. But this difference was far from the stable business-unit effects are six times able: in the following year the industries more important than stable industry effects in virtually reversed positions, auto's return rising explaining the dispersion of returns. Busines to 22. 1 percent and corn wet millings return units differ from one another within industries falling to 11.5 percent (Federal Trade Con a great deal more than industries differ from mission, 1975, 1976). The presence of industry one another specific fluctuations like these adds to the variance in industry returns observed in any one year. The conceptual conclusions are straightfor Thus, Schmalensee's snapshot estimate of the ward. The classical focus on industry analysis variance of industry effects' is the variance is mistaken because these industries are too among stable industry effects plus the variance heterogeneous to support classical theory. It of annual fluctuations. But the classical focus'is is also mistaken because the most important surely on the stable differences among industries, impediments to the equilibration of long-term ather than on random year-to-year variations in rates of return are not associated with industry, those differences but with the unique endowments, positions, and strategies of individual businesses My analysis of the FtC lb data shows that The empirical warning is equally striking. Most stable industry effects account for only 8 of the observed differences among industry percent of the variance in business-unit returns. returns have nothing to do with long-term Furthermore, only about 40 percent of the industry effects; they are due to the random dispersion in industry returns is due to stable distribution of especially high and low-performing business-units across industries. As will be shown an FtC industry return must be at least 15.21 The second incertitude concerns the variance not percentage points above the mean to warrant a explained by industry effects. Schmalensee noted conclusion(95 percent confidence)that the true (p.350)it ortant to recognize that stable industry effect is positive. Fewer than 80 percent of the variance in business-unit in forty industry returns are high enough to pass 2'Stable'industry effects are the(unobserved )time-invariant BACKGROUND (unobserved) time-invariant components or eets are the Most industrial organization research on business returns that are not due to industry or corporate membership. corporate, and industry profitability tests prop