Do Competitors Perform Better When They Pursue Different Strategies?*
Working Paper #2004-06
Anita M. McGahan
Boston University
595 Commonwealth Avenue
Boston, MA 02215
January 6, 2003
* Thanks to Michael Raynor, Michael E. Porter, Arthur Schleifer, Geoff Waring, and colleagues in
the strategy group at Harvard Business School and at Stanford’s Graduate School of Business for
suggestions and discussions related to this paper. This research was conducted in part while McGahan
visited at the Stanford Graduate School of Business. Thanks to James Schorr and Sarah Woolverton for
help in extracting and assimilating data. The Division of Research at the Harvard Business School provided
generous financial support for this project.
Copyright (c) 1997, 1999 A.M. McGahan. All rights reserved.
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Abstract
This paper describes the relationships between industry-average performance and strategic diversity among a
broad cross-section of firms in the American economy from 1981 to 1997. Industry-average performance is
measured using Tobin’s q and accounting profitability. Diversity in strategy among direct competitors is
characterized by differences in size, operating margin, asset composition, asset utilization, and focus. The
results indicate that competitors in high-performance industries are diverse in both their fixed characteristics
and in their tendencies to converge to the industry norm. However, contrary to the theoretical tradition of
“perfect competition,” the results also associate strategic diversity with low-performance industries. As a
whole, the study suggests that research is needed to understand the structural factors that attract firms into
industries with consistently low performance.
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While the results weakly support the isolationist view of high-performance industries, they do not
provide evidence of widespread “perfect competition” in low-performance industries. Contrary to
prediction, competitors in the low-performance industries differ significantly in the measures most
important to the theory: asset composition and asset utilization. A number of candidate explanations for
the diversity among competitors in the low-performance industries arise. First, some efficient businesses
may have become locked into poor positions that had once delivered better results. Second, entry barriers in
some low-performance industries may allow inefficient leaders to continue operations. Third, some
businesses may be engaged in investment programs and may be weathering low returns for future reward.
Further theoretical and empirical research is needed to understand the prevalence of these and other
explanations for low industry performance.
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