Final answer:
The percentage of a firm's profitability explained by the industry in which it competes is a contentious point; modern research indicates it could be between 20 to 40 percent. The Herfindahl-Hirshman Index (HHI) is crucial to understanding this relationship as it measures industry concentration and competition, providing insight .
Step-by-step explanation:
The question addresses the influence of industry characteristics on a firm's profitability, which is part of strategic management and business studies. Research on this topic often refers to the structure-conduct-performance paradigm, which suggests that the profitability of firms is significantly shaped by the industry structure in which they operate. Previously, it was widely believed that the industry's characteristics could determine as much as 90 percent of a firm's profitability. However, more recent research proposes that this figure is substantially less, with some studies indicating that around 20 percent to 40 percent of a firm's performance is attributable to the industry effects.
An important tool used to measure industry concentration and competition is the Herfindahl-Hirshman Index (HHI). The HHI is calculated by squaring the market share of each firm competing in the industry and then summing the resulting numbers, it gives greater weight to larger firms, therefore providing a more nuanced view of the market structure than simple concentration ratios. For example, in industries where a few firms dominate the market, the HHI will be considerably higher, indicating less competition and potentially higher profitability associated with market power.
Considering the crucial role of competitiveness and market structure, those studying business and market dynamics would benefit from a deep understanding of analytical tools like the HHI and the relationship between industry concentration and firm performance.