400 G. S. Hansen and B. Wernerfelt example from each class of models. We will argue considered in the literature, We divide these into that these examples are somewhat representative the three classes mentioned above. Each is but they are, nonetheless, only examples. Readers discussed in turn simplistic may well expect a more complex ample to capture more of the variance in firm Industry variables profits. This problem of selecting a representative A long tradition, most often associated with Bain model seems particularly acute for the organi -(1956) is concerned with identifying properties e because of its numerous of industries contributing to above-average pre theories and levels of analysis found in the itability. A large set of variables (growth, literature, but that model actually does better in concentration, capital intensity, advertising inten our sample. Second, we use accounting rates of sity, etc. ) have performed differently in different return as our measure of performance. Within studies, but the overall importance of these the economic tradition these have been the factors is beyond dispute(Ravenscraft, 1983). In subject of some debate(Bentson, 1985), but they a study such as ours, where interest is focused are still commonly used, and arguments have on the importance of industry per se, rather than been raised in their defense(Long and Ravens- on characteristics of more or less attractive craft, 1984; Jacobson, 1987). The choice of profit industries, the effect of industry can be captured rates is less obvious vis-a-vis the organizational by the average industry profits. A recent study literature. While profits have been used within by Schmalensee (1985) shows that differences that tradition, so has a large number of other between industries as measured by average concepts of performance(e. g. satisfaction, sur- industry return on assets account for almost vival, etc. ) If the organizational model had all the explained variance in business unit erformed less well, this would have been a performance serious problem In the next two sections we present economic and organizational models. We then Variables relating the firm to its competitors describe our data and give the results, ending The key member of this class is relative market with a discussion of the implications of our share, a variable which has been widely used in findings strategy and is emphasized PIMS(PIMS, 1977; Buzzell and Gale, 1987) Originally perceived as the source of market ECONOMIC MODEL OF FIRM power(Shepherd, 1972) market share and more PERFORMANCE specifically relative market share as viewed for this study serves as a proxy for some firm-specific Industrial organization economics has proven relative competitive advantage resulting from extremely useful to researchers of strategy content learning effects and other firm specific assets in providing a basic theoretical perspective on(Karnani, 1984) the infiuence of market structure on firm strategy nd performance. While there is a range of inants of firm-level Firm variables profitability include: (1)characteristics of the We complete our model with firm size. This industry in which the firm competes;(2) the most often interpreted as a source of organi firms position relative to its competitors; and(3) zational costs(Shepherd, 1972), or X-inefficiencies the quality or quantity of the firm's resources. (Leibenstein, 1976). From a strategy perspective Scherer (1980: Ch. 9) surveyed many of the we note that size also may be an indicator of pecific models of both industry- and firm-level diversification, which by and large has been performance, and Porter's review(1981)describes found to affect performance negatively(Rumelt he influence of the IO paradigm on business 1982; Porter, 1987; Wernerfelt and Montgomery Our economic model, while only an exampl Overall, the typical economic model of firm includes several of the explanatory variables performance explains from 15 to 40 percent of