Strategic Management Journal, Vol. 10, 399-411(1989) DETERMINANTS OF FIRM PERFORMANCE: THE RELATIVE IMPORTANCE OF ECONOMIC AND ORGANIZATIONAL FACTORS GARY S HANSEN Graduate School of Management, University of Washington, Seattle, Washington U. SA BIRGER WERNERFELT Alfred P. Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts, U.S.A We decompose the inter firm variance in profit rates into economic and orga e model from each paradig we find that bol actors are of firm performance. Further findings are the ects are d that organizational factors explain about twice 如 INTRODUCTION Theory or empirical evidence of linl performance abound within each paradigm, but In the business policy literature there are two surprisingly little has been done to integrate the major streams of research on the determinants two and evaluate the relative effect of each on of firm performance. One is based primarily firm profitability. Notable exceptions are recent importance of external market factors in deter- kani (1988), Miller (1986), White(1986), White mining firm success. The other line of research and Hammermesh(1981), and Lenz(1981), who builds on the behavioral and sociological paradigm discussed and/or evaluated a limited number of and sees organizational factors and their fit with contingent relationships between economic and the environment as the major determinants of administrative factors. No work has been done success. Within this school of thought, little direct however, to assess the relative importance of attention is given to the firms competitive these two sets of explanatory factor position. Similarly, economics traditionally has In h an integrated disregarded factors internal to the firm. examination of firm profitability. Utilizing a d behavioral data base I The following statement, from Buzzell and Gale(1987), is we construct and test three models of firm typical. 'Our treatment of strategy is also confined to performance, first an example from an economic In contrast, some other elements of strategies cannot be perspective, second an example from an organi- dimensions that can be measured in reasonably clear terms readily measured, or perhaps measured at all. There has zational perspective and the third an integration differences unquestionably affect performance. But we know economic and organizational componen to its ms of their cultures, and such the inter-firm variance in prc of no way to measure the key policies, management Before describing the study we would like to or personality factors that shape corporate cultures. make two things clear. First, we do not propose that would be equally difficult to quantify or even to synthesize all economic and organizational theories of firm performance. We have taken an 0143-2095/89060399-13506 Received 17 September 1987 C 1989 by John Wiley Sons, Ltd Revised /7 January 1989