Markets vs Managemen 655 and Drury, 1938). This rapidly developing body answer the question what is the relative impact of literature argues that the forgotten half of of industry factors vs. firm effects on financial Andrews model (the marshaling of internal performance? resources to develop distinctive competencies) Of all the past research, however, two studies needs to be brought back into the core of strategy dominate the literature. First is the classic article ( Bartlett and Ghoshal, 1991: 8-9). A clear impli- by Schmalensee (1985), cited earlier by cation of resource-based theory is the obvious Montgomery and Porter (1991) in support of their choice of unit of analysis; namely, that it requires emphasis on industry factors. Schmalensee(1985) a focus on the individual firm investigated estimates of the relative importance G A highly important second implication relates of firm(corporate ), market(industry ), and market the methodologies suitable for organization share on business unit profitability. He used the studies. Since idiosyncratic attributes rep Federal Trade Commission(FTC) line of business source of competitiveness, a reliance on detailed (LB )data for 1975 and both regression analysis ase studies, or at least in-depth analysis, appears and an analysis technique that was then unique to to be required. It do st. at least at the ioe lite first glance, that resource-based theory should (See Appendix 1 for further discussion) supplant the traditional and well-established IOE Schmalensee (1985)concluded his regression frameworks, but rather that it supplements them. and variance component analyses with four prop What we have seen then, in essence, is the ositions, two of which are relevant to the present strategic management field coming almost full work. The relevant propositions state that circle in terms of what early policy researchers (1) firm effects do not exist, and(2)industry identified as the basis for good strategy formu- effects exist and are important, accounting for at lation'( Collis, 1991: 65) least 75 percent of the variance of industry rates The deterministic vs. choice orientation of the of return on assets(Schmalensee, 1985: 349) effectiveness research does not account solely for The second major work to address the relative differences in units of analysis(as shown by part variance question was that of Rumelt(1991), of the organization theory literature), but rather who explored the variance accountability issue of each approach brings with it different perspec- industry vs. other factors. Because Rumelt(1991) tives, biases, and methodologies. As Rumelt was concerned with Schmalensee's(1985)use of (1974: 560)points out: a single year's data, he extended Schmalensee's he mismatch arises because polic (1985) methodology to cross-sectional and time researchers and economists have been interested series data by using 4 years'worth of data, and substantially different phenomena. The central included a term in his equation not only for oncerns of business policy are the observed corporate management( what Schmalensee, 1985 heterogeneity of firms and firm's choice of called firm effects ), but for SBU level manage- oduct-market commitments. By contrast, the ment also basic phenomena of interest in neoclassical theory is the functioning of the price system under norms of decentralized decision making COMPARING SCHMALENSEE (1985) It should also be added that economists tend to TO RUMELT(1991) see firms as players in a multifactor economic game, and their interest is in the game and its Schmalensee(1985) used the Ftc lB data for outcomes, rather than in the particular play or the year 1975. SBU returns on assets (ROAs performance of individual firms'(Nelson, 1991: were decomposed by an equation in the form 61) rom the foregoing discussion, it is apparent ri=H+a;+B;+ ySy+ei that there are opposing assumptions about the strength of environmental forces(choice or where ri is the rate of return of firm is operations determinism) seen in different literatures. Second, in industry j(SBU ROA); S is the market share; each set of assumptions implies justification of a are firm effects, p are industry effects, u and fferent units of analysis. In light of these two y are constants; and e are disturbances arguments, the strategy field has recently tried to Schmalensee (1985: 343-344)stated that