Hard Facts, Dangerous Half-Truths, and Total Nonsense by Sutton Robert I. & Pfeffer Jeffrey

Author:Sutton, Robert I. & Pfeffer, Jeffrey [Pfeffer, Jeffrey]
Language: eng
Format: epub
Publisher: Harvard Business Press
Published: 2006-02-13T14:00:00+00:00

TABLE 6-1

The 10 best-performing stocks, 1972–2002

Company Compounded annual return

Southwest Airlines 25.99%

Wal-Mart Stores 25.97%

Kansas City Southern Industries 25.61 %

Walgreen Company 23.72%

Intel Corporation 23.49%

Comcast Corporation 21.99%

Circuit City–CarMax Group 21.71 %

Forest Laboratories 21.69%

State Street Corporation 21.45%

The Kroger Company 21.16%

What accounts for this great performance by companies operating in undesirable industries? The answer is to be found by considering the dependent variable. Coming out of the economics tradition, the industrial organization approach to strategy sought to understand the development of market power, and one good measure of market power is the ability to charge a high price compared to costs—the price-cost or profit margin. But there are other measures of company performance, such as total shareholder return (the measure chosen by Money and one that is increasingly in vogue) or even growth in things such as sales or market share—potential indicators of increasing market acceptance—or profits. It turns out that there is evidence that these alternative measures yield very different results with respect to what affects company performance. In a study of more than 1,800 companies traded on U.S. stock exchanges with a market capitalization of more than $500 million in 1994, researchers at Booz Allen Hamilton found that “companies in slowgrowing, more mature industries are somewhat more likely to create superior returns for shareholders than companies in fast-growing industries.17 A study of growth rates of companies in different industries found that industry growth rate did not predict the growth of individual companies within each industry.18 In other words, there was as much variation in companies’ ability to grow within as across industries, reinforcing the concerns of academic scholars as to how much industry really matters.

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