Note on the Impact of Industry and Firm Factors on Firm Profitability: An Analysis of the Fortune 1000 from 1996–2004
17 Pages Posted: 23 Jun 2009
Abstract
Building on previous research, this note examines the results of a study of firms on the Fortune 1000 list from 1996 to 2004. The note brings those studies up to date by introducing more recent industry return data and extends the analysis to include a discussion of how profitability within and across industries may and does vary over time, as well as the implications of such a phenomenon. The note also details the impact of competition—specifically, the level of a given industry's concentration among its top firms—on profitability. Profitability in the study uses three metrics: return on equity (ROE), return on sales (ROS), and return on assets (ROA) to compare the firms on the Fortune 1000 list to uncover key findings.
Excerpt
UVA-S-0152
Nov. 25, 2008
NOTE ON THE IMPACT OF INDUSTRY AND FIRM FACTORS ON FIRM PROFITABILITY: AN ANALYSIS OF THE FORTUNE 1000 (1996–2004)
Overview
Both firm and industry return data have long been analyzed in the hopes of explaining and forecasting performance. Although this research has not yet succeeded in producing an error-proof predictive tool, it has begun to shed light on some of the many variables that contribute to industry profitability.
Anita McGahan, in her 1992 work on selected manufacturing profitability data, demonstrated that returns vary widely both across and within industries. David Collis and Pankaj Ghemawat took a more theoretical view, proposing that industry analysis can best be used by a strategist when interindustry profit differences, intraindustry profit differences, and personal judgment are used simultaneously. Jeffery Furman compared the impact of industry choice, corporate parent, and business-segment effects in four Organisation for Economic Co-Operation and Development (OECD) countries and determined that, while industry choice is significant in determining returns, business-specific effects predominate in explaining variance in profits.
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Keywords: Industry profitability, competition impact, return on equity, return on sales, return on assets
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