Does Interdependency Affect Industry Profitability? An Empirical Test

Strategic Management Journal, Vol. 31, No. 2, pp. 121-139

Posted: 7 Oct 2010

See all articles by Michael Lenox

Michael Lenox

University of Virginia - Darden School of Business

Scott Rockart

Duke University

Arie Y. Lewin

Duke University - Fuqua School of Business

Date Written: 2010

Abstract

Strategy researchers have argued that heterogeneity in firms’ practices and profitability within and across industries may derive from industry-level differences in the extent of interdependencies among firms’ activities. Theoretical models have clarified how and why differences in the extent of the interdependencies faced by firms across industries may affect the distributions of firm profits, but the specific predictions from these models have not been empirically tested. In this paper, we present what we believe is the first large scale empirical analysis linking differences in the extent of interdependencies across industries to differences in the distribution of firm profits within and across those industries. We use survey data to measure interdependencies systematically across a wide number of industries, thus addressing the primary obstacle to incorporating interdependencies in larger scale empirical work, and find evidence consistent with the theoretical predictions: average profitability is highest in industries with moderate levels of interdependency; the dispersion of profits among firms is higher in industries with more extensive interdependencies; and industries with more extensive interdependencies have a more positively skewed performance distribution. We find that the effect of interdependencies on average industry profitability is similar in scale to the effect of patent protection and industry growth rates, placing interdependency squarely among the strategy field’s central concepts.

Keywords: interdependencies, NK model, industry profitability

Suggested Citation

Lenox, Michael and Rockart, Scott and Lewin, Arie Y., Does Interdependency Affect Industry Profitability? An Empirical Test (2010). Strategic Management Journal, Vol. 31, No. 2, pp. 121-139, Available at SSRN: https://ssrn.com/abstract=1687937

Michael Lenox (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://faculty.darden.virginia.edu/LenoxM/index.htm

Scott Rockart

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States

HOME PAGE: http://www.duke.edu/~srockart

Arie Y. Lewin

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7832 (Phone)
919-681-6244 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/ayl3.htm

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