Running head: DISCUSSION CHAPTER 1.3
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Discussion Chapter 1.3
Student’s Name
Institutional Affiliation
DISCUSSION CHAPTER 1.3
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Discussion Chapter 1.3
Part A
Industry effects are descriptive of the primary economic organization of the industry and
are determined by components such as entry and exit barriers, number, and size of companies
among others (Rothaermel, 2017). On the other hand, Firm effects attribute the performance of
the company to the actions of the manager.
Firm effect deals with internal strategies, procedures, and policies. Therefore, the
profitability of a firm depends mostly on their way of operation rather than external factors since
external factors are constant to all. For large scale companies, firm effects play an important role
due to size and creative accumulation. Moreover, the creation of profit depends on the way
resources were allocated and the value created afterward. Resource allocation is primarily the
role of managers. For a firm to compete effectively, the firm should have an accumulative
advantage which, though not mainly, arises from competent and well-motivated staff. These
factors lie under firm effects. Therefore, firm effects are more essential than industry effects.
Firm effects have a positive impact on service industries. This is because imitation of the highly
customized services in the industry is difficult; hence those firms that customize better reap the
benefits.
Part B
Industry effects are important in the situation involving medium-sized companies. The
reasoning behind this assertion is that for the reason of their “wrong size” they are disadvantaged
competitively concerning both large and small firms (Fernandez et al., 2019). That is, their
profitability can only be expounded on the basis of their participation in a highly lucrative
DISCUSSION CHAPTER 1.3
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industry in which competitive concentration is low. Industry effects are so substantial that
average companies in great industries tend to outperform great companies in a poor industry.
This is particularly true when comparing real estate companies and software companies.
Software companies will perform well because the industry is experiencing an upward growth
trend.
DISCUSSION CHAPTER 1.3
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References
Fernández, E., Iglesias-Antelo, S., López-López, V., Rodríguez-Rey, M., & Fernandez-
Jardon, C. M. (2019). Firm and industry effects on small, medium-sized and large firms’
performance. BRQ Business Research Quarterly, 22(1), 25-35.
doi:10.1016/j.brq.2018.06.005
Rothaermel, F. (2017). What Is Strategy? Strategic management concepts (3rd ed.). New York:
NY: McGraw-Hill.
