How Much Does Industry Matter? 169 ositions about the causes of differential perform- Most prior work touching on the issue of locus ance. The primary tradition made industry the has done so tangentially, rough measures of intra- unit of analysis and sought a link between industry di dispersions in return being me industry concentration(and entry barriers) and in passing within a study on a different topic industry profitability (usually measured with Stigler, for example, studying the convergence pooled data).3A second tradition focused on of profit rates over time, used the relative inter-firm differences in performance, seeking proportions of positive-profit and loss corpo explanation first in terms of firm size and later rations to construct rough estimates of intra- in terms of market share. 4 The early reaction industry variances in the rate of return by IRS against the mainline tradition viewed the concen- size class(his estimates unavoidably confound tration-profitability correlation as an artifact inter-period and inter-firm variances). He induced by the deeper share-profitability link. remarked in passing(1963: 48)that these values ly, the stochastic and efficiency views explain were much larger than inter-industry variances both firm profitability and market-share, and thus but drew no implications, Fisher and Hall (1969) concentration, in terms of exogenous differential measured the long-term(1950-1964)dispersion firm efficiencies. 6 in rates of return about industry averages in In contrast to economics, business strategy order to obtain a measure of risk that could be research began with the presumption of hetero- regressed against industry profitability. Although geneity within industries and has only recently they did not remark the fact, they obtained come to grips with the question of how differences estimates that were approximately double their in efficiency are sustained in the face of compe- reported standard deviation in inter-industry rates tition. Thus. the earliest case research informed of return by the ' concept focused on the different McEnally (1976), in an analysis of results roaches ompetition adopted by firms obtained by Conrad and Plotkin(1968) within the same industry. As the field matured, that industries with larger average return tend attention turned towards developing quantitative also to have larger dispersions in long-term inter- measures of this diversity' and, more recently, firm rates of return. His figures"show inter-firm o its explanation in economic terms variances that are two to five times as large as Each of these streams of work presumes inter-industry variances different causal mechanisms and employs differ- As part re-examination of the ent units of analysis. Claims about whether profit- concentration-profitability relationship, Gort and persion reflects collusion, share-based Singamsetti (1976) were apparently the first to market power, or difficult-to-imitate resources explicitly ask whether or not 'the profit rates of are coupled with claims that the more aggregate firms cluster around industry means. Assigning phenomena are spurious or counter-claims that firms to 3-digit and 4-digit industries, they found less aggregate phenomena are noise. My intention to their surprise that the data failed to support here is to suppress concern with causal mechan- the hypothesis that industries have different isms and focus instead on the question of locus. characteristic levels of profitability. Furthermore Put differently, my concern here is with the they noted that the proportion of the total existence and relative importance of time, corpo- variance explained by industry was low rate, industry, and business-unit effects, however (approximately 11 percent, adjusted), did not generated,on the total dispersion of reported increase as they moved from 3-digit to 4-digit rates of return industry definitions, and did not increase as the sample was restricted to more specialized firm See Weiss'( 1974)survey of this line of work ad and See Demsetz(1973)and Mancke(1974), as well as Lippi Plotkin computed intra-industry variances and Rumelt(1982). directly from deviations about industry averages. Because hey are not based on true Hatten and Schendel (1977) provided early contribution their results may overestimate intra-industry variances and see McGee and Thomas(1986)for a review of the strategic produce substantially upwards biased estimates of inter- dustry variances (although the latter was not of direct K See Teece(1982), Rumelt(1984)and Wernerfelt(1984) interest to them or to McEnally)