Profitability of industries and firms over time

The purpose of this paper is to further the knowledge of how industries perform, and sheds light on how the relative positions of industry change over time.

Using rank-order listings, histograms, and linear regressions, the comparisons of firms in the Fortune 1000 yield four results, two that are confirmatory, and two that are new.

As expected, industries differ widely in performance, regardless of the financial metric used, and there is a dramatic difference between within-industry variance (high) and between-industry variance (low). In fact, high-performing firms in less profitable industries often outperform low-performing firms in more profitable industries. Contrary to previous research, the paper shows that industries shift relative position over time: the industries with the highest return on equity in one year often are not the highest in subsequent years; and, contrary to IO theory, the paper finds that concentration is not a reliable predictor of profitability. Although certain industries may show increased profitability after undergoing concentration, there is no consistent relationship between an industry's concentration ratio and that industry's average profitability.

While the research is limited to its use of visual (such as histogram) and qualitative (such as rank-order) observations of only large (Fortune 1000) US-based, public firms, the results suggest that researchers should decompose the elements of industry structure and firm strategies to understand what, specifically, contributes to variation in firm performance.

For executives, the research confirms that the quality of their business strategies is more important than the initial choice of industries within which they choose to compete. Simply competing in an industry with high average profitability does not guarantee success.

This research shows how industries vary significantly in relative profit rankings over time, a finding that differs from prior research where time coefficients are found to be small. In addition, the research challenges the traditional IO notion that industry concentration leads to superior performance.