Precis of How Much Does Industry Matter?

Richard P. Rumelt October 10, 2003
This is an abridged and slightly edited version of the paper: Richard P. Rumelt, “How Much Does Industry Matter?”, Strategic Management Journal, 12 (1991):167-185.

Because competition acts to direct resources towards uses offering the highest returns, persistently unequal returns mark the presence of either natural or contrived impediments to resource flows. The study of such impediments is a principal concern of industrial organization economics and the dominant unit of analysis in that field has been the industry. The implicit assumption has been that the most important market imperfections arise out of the collective circumstances and behavior of firms. However, there is a contrary view: it holds that the most important impediments are not the common property of collections of firms, but arise instead from the unique endowments and actions of individual corporations or business- units. If this is true, then industry may not be the most useful unit of analysis. Consequently, there should be considerable interest in the relative sizes of inter-industry and intra-industry dispersions in long-term profit rates. In the business strategy field these contrary views are represented by industry analysis, as first espoused by Porter [1980], and by the resource- based view, as articulated by Wernerfelt [1984], Rumelt [1984], and Barney [1986].1 Proponents of industry analysis see business strategy as the art of “picking good industries,” whereas proponents of the resource-based view place much more importance on the development and effective utilization of firm-specific difficult-to-imitate resources. Given this debate, it is surprising that so little research was directly addressed to this issue until Schmalensee’s [1985] estimation of the variance components of profit rates in the FTC Line of Business (LB) data. Schmalensee decomposed the total variance of rates of return on assets in the 1975 LB data into industry, corporate, and market-share components. He reported that (1) corporate effects did not exist; (2) market-share effects accounted for a negligible fraction of the variance in business-unit rates of return; (3) industry effects accounted for 20 percent of the variance in business-unit returns; (4) industry effects accounted for at least 75 percent of the variance in industry returns.2 He concluded [p. 349] “the finding that industry effects are important supports the classical focus on industry-level analysis as against the revisionist tendency to downplay industry differences.” Schmalensee’s study was innovative and technically sophisticated. Nevertheless, there are difficulties with it traceable to the use of a single- year of data.
1 Industry analysis admits heterogeneity within industries in the form of “strategic groups.” For a survey of the resource-based perspective, see Conner [1991] or Grant [1991].

For example. I find that stable business-unit effects account for 46 percent of the variance.” we do not know how much of this 20 percent is due to stable industry effects rather than to transient phenomena. and the validity of industrylevel analysis. I draw dramatically different conclusions about the importance of industry effects. 1976].1 percent and corn wet milling’s return falling to 11. The second incertitude concerns the variance not explained by industry effects. it would be the only stable pattern in the data. 1975. the existence and importance of business-level effects.3 Like Schmalensee. positions. in the following year the industries virtually reversed positions. but with the unique endowments. While industry differences matter. The most straightforward way to review my analysis is to start with what Schmalensee’s results left undecided. But this difference was far from stable. although 20 percent of business-unit returns are explained by “industry effects. Thus. I analyze the four years (1974-1977) of data available and include components for overall business cycle effects. then the “classical focus on industry” may be misplaced. I find that corporate effects are negligible. Indeed. The “classical focus on industry analysis” is mistaken because these industries are too heterogeneous to support classical theory. Furthermore. Schmalensee noted [p. I find that the majority of this “residual” variance is due to stable long-term differences among business-units rather than to transient phenomena. In this study. The first major incertitude is that. if a large portion of the intra.” If this intra-industry variance is due to transient disequilibrium phenomena. stable and transient industry effects. only about 40 percent of the dispersion in industry returns is due to stable industry effects. as well as stable and transient business-unit effects. rather than on random year-to-year variations in those differences. However. My analysis of the FTC LB data shows that stable industry effects account for only 8 percent of the variance in business-unit returns.unit effects are six times more important than stable industry effects in explaining the dispersion of returns. in 1975 the return on assets of the passenger automobile industry was 6.9 percent and that of the corn wet milling industry was 35 percent. But. Business-units differ from one another within industries a great deal more than industries differ from one another. although it explains only 8 percent of the variance. Schmalensee’s snapshot estimate of the variance of “industry effects” is the variance among stable industry effects plus the variance of annual fluctuations.5 percent [Federal Trade Commission. 3 “Stable” industry effects are the (unobserved) time-invariant components of business-unit .In this article I perform a new variance components analysis of the FTC LB data that corrects this weakness. auto’s return rising to 22. It is also mistaken because the most important impediments to the equilibration of long-term rates of return are not associated with industry. The presence of industry-specific fluctuations like these adds to the variance in industry returns observed in any one year. then the “classical focus on industry” would still be a contender. the stable business. 350] “it is important to recognize that 80 percent of the variance in business-unit profitability is unrelated to industry or share effects.industry variance is due to stable differences among business-units within industries. and strategies of individual businesses. they are clearly not all that matters. The conceptual conclusions are straightforward. Using Schmalensee’s sample. But the “classical focus” is surely on the stable differences among industries.

they found to their surprise that the data failed to support the hypothesis that industries have different characteristic levels of profitability.digit to 4-digit industry definitions. sharebased market power.S. there is only one source of disaggregate data on the profits of corporations by industry—the FTC’s Line of Business Program. or difficult-to-imitate resources and are also connected with claims that more aggregate phenomena are spurious or counter-claims that less aggregate phenomena are noise. . Most of the observed differences among industry returns have nothing to do with long-term industry effects. I Background All of the lines of research concerning industry and business profitability are connected with claims about whether profit-rate dispersion reflects collusion. The average corporation reported on about 8 business-units. they noted that the proportion of the total variance explained by industry was low (approximately 11 percent. and excluded one outlier. Gort and Singamsetti [1976] were apparently the first to explicitly ask whether or not “the profit rates of firms cluster around industry means. industry. acquisitions. Schmalensee’s sample was constructed by starting with Ravenscraft’s [1983] data-set of 3186 stable and meaningful business-units—those which were not in miscellaneous categories and which were neither newly created nor terminated during the 1974-1976 period. II Data Data on the operations of large U.performing business-units across industries. and did not increase as the sample was restricted to more specialized firms. Information on a total of 588 different corporations was collected for the years 1974-1977. because of late additions. on the total dispersion of reported rates of return. my concern here is with the existence and relative importance of time. corporate. He found that both were statistically significant.The empirical warning is equally striking. an FTC industry return must be at least 15. He then dropped business-units in 16 FTC industries judged to be primarily residual classifications. Schmalensee used regression to conclude that corporate effects were non-existent and performed a variance components decomposition to measure the relative importances of market share and industry effects. However. they are due to the random distribution of especially high and low. Put differently. Schmalensee’s [1985] study was the first published work aimed squarely at this issue and is the direct ancestor of the work presented here. Looking at the 1975 FTC LB data. Furthermore. but that industry effects were very much more substantial.21 percentage points above the mean to warrant a conclusion (95 percent confidence) that the true stable industry effect is positive. however generated. My intention here is to suppress concern with causal mechanisms and focus instead on the question of locus. dropped business-units with sales less than 1 percent of 1975 FTC industry total sales. corporations are available from a variety of sources. As will be shown. and mergers. Fewer than one in forty industry returns are high enough to pass this test.” Assigning firms to 3-digit and 4-digit industries. and business-unit effects. The FTC collected data on the domestic operations of large corporations in each of 261 4-digit FTC manufacturing industry categories. the number of corporations reporting in any one year ranged from 432 to 471. did not increase as they moved from 3. adjusted). deletions.

expressed as a percentage. .unit were allocated. 34 were excluded due to (apparent) measurement problems: negative or zero assets.73 respectively. (1) where the αi are industry effects (i = 1. advertising. .. A particular business-unit is labeled ik. note that Schmalensee [1985] used the term “firm effects” to denote what I call corporate effects. Let rikt denote the rate of return reported in time period t by the business-unit owned by corporation k and active in industry i. . and the φik are business-unit effects ( φ distinct ik combinations). Working with this notation. . α).17 and 410. highlighting the fact that it is simultaneously a member of an industry and a corporation. Sample A then contained 6932 observations provided by 457 corporations on 1774 businessunits operating in a total of 242 4-digit FTC industries. I posit the following descriptive model: rikt = µ + αi + βk + γt + δit + φik + ikt . After adjoining the 1974. In this regard. the traceable component being directly attributable to the line of business and the untraceable component being allocated by the reporting firm among lines of business using “reasonable procedures. and 1977 files. Sample B was constructed by adding to Sample A the 1070 “small” businessunits which had failed Schmalensee’s size criterion. I use the term business-unit to denote that portion of a company’s operations which are wholly contained within a single industry. After this expansion. Consequently. both industries and corporations are considered to be sets of businessunits. . his first proposition.92 and the sample variance was 279. The rate of return was taken to be the ratio of profit before interest and taxes to total assets. . 349] refers to what are here termed corporate effects.8 percent of the total expenses and 13. III A Variance Components Model To reduce the ambiguity in what follows I avoid the term “firm. the βk are corporate effects (k = 1. and general and administrative expenses. Thus. and was dropped. less selling. β ). unless more than one year of data are analyzed.” Instead. Both expenses and assets were further divided into “traceable” and “untraceable” components. Sample B then contained 10.1976.” In 1975. sales-to-assets ratios over 30. Taking the unit of analysis to be the business-unit. In sample A the average return was 13. finding insignificant corporate effects does not rule out the presence of substantial intra-industry effects. the γt are year effects (t = 1. “firm effects do not exist” [p. .866 observations provided by 463 corporations on 2810 business-units operating in a total of 242 4-digit FTC industries. I use the term corporation to denote a legal company which owns and operates one or more business-units. as he noted. the δit are industry-year interaction effects ( δ distinct it combinations). 15. However.35. Eight other observations were eliminated because assets were reported as zero. 1976 and 1977 data for these business-units. In sample B. intra-industry effects pool with the error and cannot be detected.6 percent of total assets of the average business. The FTC defined operating income as total revenues (including transfers from other units) less cost of goods sold. . The ikt are random disturbances (one for . . γ ). . Thus. the average and sample variance of return were 13. . assume that each businessunit is observed over time and is classified according to its industry membership and its corporate ownership. and extreme year-to-year variations in assets that were unconnected to changes in sales. one business-unit was judged to have unreliable asset measures (in 1976-77).

are “natural. each business-unit effect φik is seen 2 as having been independently generated by a random process with variance σφ . differing levels of risk. However. and. involving an association between industry and corporate effects. remaining fixed thereafter. corporate. differing asset utilization rates. rates of return were thought to converge fairly rapidly to “normal” levels. Total corporate returns will. the unit of analysis here is the business-unit. σβ . Consequently. However.units—it simply posits the existence of differences in return associated with these categories. 2 and σφ . variances σα . whatever their source. for example. for example. it offers no causal or structural explanation for profitability differences across industries. the usual assumption would be that the ikt are random disturbances. they were treated as an autocorrelation problem. and are independent of other effects. demand-capacity conditions. The real substance of the random-effects assumption is that the differences among effects. Instead. If they surfaced empirically. are realizations of random 2 2 2 processes with zero means and constant. Mueller [1977. patents. is discussed below. σδ2 . The random-effects assumption says nothing about why effects differ from one another—effects may differ from one another in either fixed-effects or random effects models. reputations. not the corporation. they are due to the presence of business-specific skills. resources. Such differences may also arise from persistent errors in the allocation of costs or assets among a corporation’s business-units. The φik represent persistent differences among business-unit returns other than those due to industry and corporate membership. That is. An important exception to this assumption. This consideration. years. (Note.) Are the differences among business-unit returns within industries simply disequilibrium phenomena? Until recently. is of no help in predicting the values of other business-unit effects or the values of any industry. Were this a fixed-effects model. Differences among the αi reflect differing competitive behavior. like the error term. Note that this random effects assumption does not mean that the various effects are inconstant. corporations. that corporate-wide or industry-wide biases in accounting will appear as corporate or industry effects. also be affected by the industry memberships of their constituent businesses. and any other industry-specific impacts on the rate of return. the effects in the data represent a random sample of the effects in the population. differences in resource sharing and other types of synergy. and other intangible contributions to stable differences among business-unit returns. Independence implies that knowing the value of a particular φik . rates of growth. or business. If this assumption is incor- . however. of course. In particular. and the fact that the FTC LB data covers only four years. In this model I make the additional assumption that all of the other effects. researchers using more disaggregate data have discovered that abnormal profit rates do not rapidly fade as given and is essentially descriptive. leads to modeling the business-unit effects as fixed. learning. or year effects. drawn independently from a distribution with mean zero and unknown variance σ2 . σγ . having once been set. That is. The αi represent all persistent industry-specific impacts on observed rates of return. conditions of entry. 1985] and Jacobson [1988] have found them to be extraordinarily persistent. differing accounting practices. but unknown.” not having been controlled or contrived by the research design. The fundamentally descriptive model used here offers no hypotheses as to the nature of these industry differences—the αi represent their total collective impact. Corporate effects βk should arise from differences in the quality of monitoring and control. the idea of business-unit effects had little currency. and differences in accounting policy.

Whereas the industry and industry-year components are comparable in both samples.82. the sum of the variance components is not the sample variance. As will be seen. The fundamental differences between the two samples is that in sample B the non-industry variances are substantially larger. 8 (5) percent industry-year effects. The normal practice is to replace small negative estimates with zero and take large negative estimates 2 as an indication of specification error.01. (2) where Cαβ is the covariance between αi and βk . p. 2Cαβ = −0. 46 (44) percent business-unit effects. 5 These estimates were obtained by simulation: taking the variance components at their estimated values. and 0 otherwise). 1 (2) percent corporate effects. In an important exception to the independence assumption.a more complex autoregressive model. Schmalensee [1985. Finally. results surely indistinguishable from zero. whereas the inclusion of the smaller business-units (sample B) provides some evidence of (small) corporate effects. and 37 (45) percent residual error. there is an ikt associated with each observation. 2 The results strongly suggest that σγ = 0 and Cαβ = 0 in both samples. Although these effects have been named “error.e..5 With regard to the corporate effects. in sample B business-unit variance component is 40 percent larger than in sample A and the residual error is 80 percent larger.4 The standard errors of the estimates offer strong evidence that the estimates of the larger variance components are not overly noisy. given that corporation k is active in industry i (i. The restrictions produce only slight changes in the estimates of the remaining variance components. The γt represent year-to-year fluctuations in macroeconomic conditions that influence all business-units equally. the total variance σr2 of returns may be decomposed into these variance-covariance components: 2 2 2 2 σr2 = σα + σβ + σγ + σδ2 + σφ + σ2 + 2Cαβ . the model was re-estimated with these restrictions. The procedure used does not prohibit negative estimates. The results are shown in Table 2. σγ = −2. IV Empirical Results Table 1 displays the estimated variance-covariance components for the full model. rather than about r the true mean µ. thereby inducing a dependence between the values of β and α observed across business-units. it is very close in both cases and the difference will be ignored in what follows. and maintaining elsewhere the assumption of independence. and in sample B. no such autocorrelation was found in the data studied here. V Discussion and Implications The variance in business-unit profitability in sample A (B) may be partitioned approximately as follows: 8 (4) percent industry effects. However. making industry relatively less important. Incorporating this presumption.” they may equally well be thought of as year-to-year variations that are specific to each businessunit. In sample A. E (αiβk ) = Cαβ if business-unit ik exists. 4 Because the sample variance s2 is computed about the sample average. Accordingly. a realization of each effect in the model was generated by a draw from the . I conclude that there is no evidence of non-zero corporate effects in sample A. The δit represent industry-specific yearto-year fluctuations in return. 344] argued that corporations which are more skillful at operating businesses might also be more skillful at having identified and entered more profitable industries.

41 percent of the variance was unexplained by industry. His study of sample A for 1975 measured a variance component due to share of 2.12 percent. Long-term industry effects account for only 8. the opposite pattern emerges: the contribution of industry falls from 8. The presence of strong business-unit effects is consonant with the presump- .) If the components are expressed as percentages. Turning to the intra-industry variance. 2. my partition of this intra.28 percent of the observed variance among sample A business-unit returns. the variance among stable business-unit effects is six times as large as the variance among stable industry effects—business-units differ from one another within industries much more than industries differ from one another. I find that only one-half of this variance is due to stable effects. Table 3 compares the variance partition for sample A with that reported by Schmalensee [1985]. Schmalensee estimated that 19.(The corporate variance component is three times as large but its magnitude is small in both samples. In this study.industry variance into stable and year-to-year components reveals that over one-half is due to stable business-unit effects.01 percent in sample B. The variance among business-unit effects is much larger than the variance among industry effects (six times larger in sample A and eleven times larger in sample B). are not important in explaining the dispersion in observed rates of return among business-units. it seems safe to conclude that only a very small part of the large businessunit effects can be associated with differences in the relative sizes of businessunits. Whereas economists are quick to refer to inframarginal rents when this issue arises. The business-unit effects are large and owe only a small fraction of their strength to market share. some strong general results can be reported: 1. or related to scale. Schmalensee reported that 80. There are significant business-unit effects in U. Business-Unit Effects The large observed variance component for business-unit effects overshadows the other variance components. More importantly.7 percent of the business-unit variance component estimated for sample A data in this study. Although this model cannot reveal the sources of this dispersion. whereas the percentage contribution of the business. of course. However. should appear as industry or corporate effects. 16. be due to measurement biases. although present in sample B. Indeed.2. Corporate effects. the comparable figure in this study is 83.59 percent of the total variance was due to industry effects. the unspoken presumption is that these effects are small. some insight can be gained by examining Schmalensee’s results on the importance of market share. Hence. Despite the fact that this is a descriptive study. This amounts to 1. The results are otherwise. The difference between the estimates arises mainly because 1975 was an abnormal year—repeating Schmalensee’s one-year analysis in 1976 and 1977 yields smaller industry components. The large business-unit effects indicate that there is more intra-industry heterogeneity than has been commonly recognized.08 percent. manufacturing activities that strongly outweigh industry and corporate membership as predictors of profitability. Some portion of these effects may. differences in industry accounting and differences in corporate policy. But the most obvious sources of bias.S.unit component is virtually unchanged.29 percent in sample A to 4. is due to all industry effects (stable plus year-to-year fluctuations). I find that somewhat less.

of course. This result. it necessarily gives broad support to this class of theory and should encourage further work in this vein. there is little reason to expect that any of the corporation’s other business-units will be performing at other than the norms set by industry. (This portion would be smaller had the averages been taken over more than four years. the number of consulting firms that specialize in corporate management. and the focus on senior corporate leaders in the business world. corporate culture.) Because only forty percent of the variance in industry returns is due to industry effects.size. What Do Industry Returns Measure? If business-units within industries have large and persistent differences in return. there is no evidence of “synergy. to what extent are such differences due to systematic industry effects and to what extent are such differences the veiled result of differences in individual business-unit performance? The actual variance among average industry returns was 61.” [p.unit within a corporation is very profitable. one-eighth in sample B) is due to various industryyear and business-unit-year fluctuations. if one business. corporations exhibit little or no (differential) ability to affect business-unit returns. Using the variance components model.” Given the extent of the literature on corporate strategy. The remaining variance (one-fifth in sample A. product-specific reputation. this variance can be broken into its constituent parts. Corporate returns will. it is surprising to find only vanishingly small corporate effects in these data. Although this study cannot discriminate among the various theories regarding the sources of intra.mover advantages. industry returns are noisy estimates of the true industry effects.1 in sample B. 250] ideas in this area have evolved in the direction of recognizing increasingly disaggregate sources of resource immobility or specificity. This partition reveals that only about forty percent of the variance among industry returns is actually due to stable industry effects. The results are shown in Table 4.6 According to this view. Put differently. when industries exhibit differing levels of overall return. Corporate Effects Turning to the issue of corporate effects.9 in sample A and 58. In sample A an additional forty percent is due to business-unit effects which randomly combine to affect industry averages. corporate returns will differ because their portfolios of business-units differ. causal ambiguity that limits effective imitation. and industry-year effects. first . Corporate returns will differ because of their differing patterns of participation in industries. differ from one another for reasons other than corporate effects. year. a variety of first. But the results indicate that the dispersion among corporate returns can be fully explained by the dispersions of industry and business-unit effects. team-specific learning. How large does an industry return have to be in order to justify a conclusion that the corresponding industry effect is positive? Additional analysis shows that industry returns are such noisy measures of industry effects that only about six of the 242 FTC industries studied could be judged (95 percent confidence) to have positive industry effects. and other special conditions permit equilibria in which competitors earn dramatically different rates of return. in sample B the corresponding proportion is close to one-half. it becomes necessary to ask what the “industry returns” measures used in many industrial organization studies actually represent. More importantly. That is.industry heterogeneity. It is not that corporate effects 2 do not exist—it appears that σβ > 0 in sample B—but rather that corporate effects are astonishingly small.

References Barney. Nevertheless. Theoretical or statistical work seeking to explain an important portion of the observed dispersion in business-unit profit rates must use the businessunit (or even less aggregate entities) as the unit of analysis and must focus on sources of heterogeneity within industries other than relative size. 5. pp. some industries being much more heterogeneous than others. R. Robert M. E. manufacturing businesses are due to resources or market positions that are specific to particular business-units rather than to corporate resources or to membership in an industry. business-units within industries differ from one another a great deal more than industries differ from one another. Michael and Rao Singamsetti. Grant. Porter. “Concentration and Profit Rates: New Evidence on an Old Issue. Consequently. and M.. it 2 may be that the assumption of a constant σφ is unjustified. and Business Strategy.S. Gort. 91. 3. at best. Statistical Report: Annual Line of Business Reports.” Occasional Papers of the National Bureau of Economic Research: Explorations in Economic Research. May 1977. The simple revisionist model in which business-units differ in size due to differences in manufacturing efficiency is incorrect—only a small portion of the large observed variance among business-unit effects can be associated with differences in relative size. Or. “A Historical Comparison of Resource-Based Theory and Five Schools of Thought Within Industrial Organization Economics: Do We Have a New Theory of the Firm?” Journal of Management.Implications To the extent that accounting returns measure the presence of economic rents. It may be. Published in 1981 and 1982. “Strategic Factor Markets: Expectations. Federal Trade Commission. 4. 1976.” Quarterly Journal of Economics. 1231-1241. it seems worthwhile to sharply and clearly state the implications of this study: 1. Empirical results are rarely definitive and there are a number of issues left unresolved in this study. Winter 1976. 1975.. 121-54. The neoclassical model of industry as composed of firms that are homogeneous (but for scale) does not describe 4-digit industries: these data show real industries to be extremely heterogeneous. most empirical work within the industrial organization paradigm has been conducted on data at this or higher levels of aggregation and persistent intra-industry heterogeneity has been generally assumed away rather than measured.” . “From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition. Caves. 2. Theoretical or statistical explanations of business-unit performance that use the corporation as the unit of analysis can. explain only about eight percent of the observed dispersion among business-unit profit rates. 32. 1991. at best. explain only about two percent of the observed dispersion among business-unit profit rates. for example. Put simply. 1-20. Luck. Theoretical or statistical explanations of business-unit performance that use industry as the unit of analysis can. “The Resource-Based Theory of Competitive Advantage. 17. E. the results obtained here imply that by far the most important sources of rents in U.” Management Science. 3. October 1986. Conner. pp. that the FTC 4-digit industries are simply too broad to reveal the true strength of industry effects. Kathleen R. Jay B. 241-61.

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64 44.63 102.19 131.03 1.91 2.75 181.38 4.09 16.31 4.26 3.56 Percent 7.00 .25 129.50 184.17 44. 21.31 7.20 21.69 2.84 6.26 2.87 100.84 8.01 184.95 Percent 5.18 Sample B Std.82 24.72 3.80 46.49 -0.51 Sample B 0.00 Est.49 0.79 100.32 0. Error 2.62 6.55 6.51 279.74 20.Table 1 Variance-Covariance Components Estimates: Full Model Component Year Industry-Year Industry Corporation Business-unit 2Cαβ Error Sample A -2.06 Table 2 Variance Components Estimates: Restricted Model (Year Effects and Cαβ Removed) Sample A Std.04 Component Industry-Year Industry Corporation Business-unit Error Total Est. Error 2.74 181.13 102.04 3.89 16.92 23. 22.06 410.37 36.04 4.

0 58.3 5.1 .46 0.3 25.0 26.3 42.6 47.5 9.Table 3 Comparison with Schmalensee’s Results (Percentage of Total Variance by Source) Source Corporate Industry Industry-Year All Industry Share Share-Industry Covariance Business-Unit Business-Unit-Year All Intra-Industry Total (x) Component not estimated. This Study Sample A 0.80 8.62 (x) (x) 80.0 61.7 59.54 100.70 83.08 100.28 7.3 39.12 (x) (x) 46.7 7.0 12.6 29.63 -0.84 16.7 5.6 10.00 Table 4 Estimated Components of Sample Variance Among Industry Average Returns Source Industry Industry*Year Business-Unit Error Total Actual Sample Variance Sample A Component Percent 23.8 5.27 100.5 55.9 Sample B Component Percent 16.2 8.38 36.00 Schmalensee [1985] (x) (x) (x) 19.8 100.