16 A.M. McGahan and M. E. porter explore how the effects interact. Industry pr Our analysis differs from prior work in to have werful direct and indirect infl ays. First, we use recently compiled data from on profitabilit the Compustat Business Segment Reports for 1981 through 1994. This dataset covers activity in all sectors of the American economy(except ANTECEDENTS the financial sector ) whereas the prior studies cover only manufacturing. The breadth of cover- Schmalensee (1985)examined the accounting age provides not only a representative sample on profits of American manufacturing firms that were the economy but also allows examination of profit covered in the Federal Trade Commissions Line influences across sectors. The average time series of Business Report for a single year, 1975. He on each economic unit in our dataset is 5.7 years found that industry effects accounted for about which compares favorably with the 4-year series 20 percent of variation in business-unit profits on each business unit in Rumelt's data. Because (and nearly 100% of total variance explained), our dataset covers a 14-year period, our results and that corporate-parent effects(or 'firm effects, reflect several phases of the business cycle in his terminology) had no impact on variation. Second, we show how the results are affected Schmalensee's only measure of heterogeneity by a more robust statistical approach to inter among participants in the same industry was mar- temporal persistence. Rumelts specification ket share. He reported that share positively affec- allows for transient industry effects, but does not ted business-unit profits, but only by a negli- similarly allow for transient year, corporate-par ible amount ent, or business-unit effects. Our specification Rumelt (1991) extended Schmalensee's allows for transience in all effects, and we report approach by including data from the FTC Reports the effect of the difference in method on manufacturing firms for all available years Third, our unit of analysis differs. The Compu 1974 through 1977. With data on more than one stat Reports contain information on firm profit by year, Rumelt generalized Schmalensee's measure SIC code (i.e, by business segment), not by of intraindustry heterogeneity to all business-unit business unit. Schmalensee and Rumelt examined effects rather than just market-share effects. He the business-unit returns given in the FtC data. eported that business-unit effects explain 44-46 We believe that the average business segment percent of variation(about 73%of the explained covers the activity of several business units. All variation), stable and transient industry effects else equal, the diversity of business-unit activity account for a total of 9-16 percent of variation, attributed to a single 4-digit SIC code may arti and corporate-parent effects explain 1-2 percent ficially reduce the measured influence of industr of variation. It is these results-the relatively low relative to Schmalensee and Rumelt. Moreover, proportion attributed to industry effects compared our need to rely on the SIC system for industry with business-unit effects-that have been inter- classification further diminishes the measured esti preted to support the resource-based perspective. 4 mates of industry influence because SIC industries err primarily in being overly broad. In our dis " Rumelt's report of low corporate-parent influence is not cussion, we suggest that the influence of industry consistent with a resource-based view of diversification, and might be even stronger if data of finer grail has stimulated additional research. In a study of diversified were available rt, Andrisani, and Phillips(1996) challenge RUr S, Ro Like Rumelt, our specification includes a num- on corporate-parent effects. The authors find that corporate- ber of potential sources of variation in accounting Rumelt(1991). The Roquebert et al. study is not directly industry factors, corporate-parent effects, and seg et al, exclude single-business firms from their analysis. This ment-specific effects. This last category, segment- our Compustat Business Segment data, singlesithied firms. In Specific effects, encompasses all business-segment ructed from the perf account for half of all assets. When we exclude single rporate-pare itially. Low estimates of industry tendency may compound IS ebert et al. approach may dist corporate-pare ises from the exclusion of ent influence because of negative all single ness nirms