Project 3

Learning Topic

Industry Analysis It is important to appreciate the difference between industry

performance and company performance, as different forces

drive profitability at each level. Any industry that is not willing

to change with the times is vulnerable to poor performance in

the medium and long term. Companies operate in a global

economy, and an industry’s survival in the medium to long

term is based on its ability to change with the times and

regroup according to changes the economy in their markets.

Whether industry performance is generally good or poor over

the long term, the overall economy and, for some industries,

commodity prices are factors. However, the real drivers of

industry performance are strategic factors—Porter’s five

forces (Porter, 2008)—four of which affect the degree of

competition in an industry, and all five of which affect the

overall attractiveness (i.e., profitability) of an industry. For

traditionally high-performing industries like pharmaceuticals,

the five forces are set very favorable conditions. The opposite

is the case for low-performers, like airlines, utilities, and food

producers.

As an example, Microsoft and Apple operate in an industry

with fairly differentiated product lines and with buyers who

have high switching costs once they are invested in the

company’s products. Therefore, each company can earn high

profits from those near-captive buyers, who have little power

to complain or to influence either company’s pricing,

profitability, or service. This is a good industry position for

both companies, which greatly affects their success.

By contrast, the airline industry has high competition (i.e., the

same routes and customers), high exit barriers (i.e., heavy

capital investment), and high “power of suppliers” (notably

fuel suppliers). In this industry, profits are kept low for all

firms, as they largely compete on price for buyers who have

many choices. This is an unprofitable industry, with a

commoditized product (lots of buyer choice, so lots of buyer

power), but company factors can mitigate some of those

negative industry factors.

Consider Southwest Airlines, which has managed to be

profitable in this unprofitable industry. According to Porter

(1996), differentiation can mitigate this commoditizing

effect. With a commoditized product in an unprofitable

industry, it is not easy to differentiate, but companies try to

do so, as Southwest’s example shows.

Another risk mitigation strategy airlines have tried in order to

avoid direct price competition is to negotiate more favorable

long-term fuel contacts, to reduce an individual firm’s costs

and allow it to be more profitable than its competitors at the

same price level.

Aside from Porter’s five forces, other factors can also

influence an industry’s potential performance. As an example,

the consumer industry has high entry barriers in the form of

marketing networks that protect firms from new

entrants. Government regulation is not one of Porter’s five

forces, yet it is a powerful influence, as government rules can

affect each of the five forces, which in turn affect the

competitiveness of the industry.

Consider FDA regulations for the pharmaceutical industry or

emission regulations for the auto industry. These regulations

can drive supplier costs and licensing requirements can

directly drive costs for all firms. Understanding these forces

can help firms develop mitigating strategies to weaken the

effect of powerful suppliers (e.g., long-term fuel contracts) or

powerful buyers (e.g., monitoring their changing needs and

desires) or keep out new entrants (e.g., investing in R&D for

patents).

Consequently, it is important for firms to recognize the

industry factors and how they operate in order to develop

risk-mitigating strategies. That is why it is crucial to consider

multiple levels—industry, company, and country level—as you

consider how marketing and strategy can affect firm and

industry performance.

Activities that constitute a value chain are generally carried

out in global networks. Global value chains (GVCs) break up

the production process so different steps can be carried out

in different countries. Many smart phones and televisions, for

example, are designed in the United States or Japan,

incorporate sophisticated inputs—such as semiconductors

and processors—produced in the Republic of Korea or Taiwan,

and are assembled in China (World Bank, 2017).

According to Gereffi and Fernandez-Stark (2016), “By

focusing on value-adding activities from conception and

production to end use, global value chain (GVC) analysis

provides a view from the top down, for example, examining

how lead firms ‘govern’ their global-scale affiliate and supplier

networks, and from the bottom up, for example, asking how

these business decisions affect the ‘upgrading’ or

‘downgrading’ in specific countries and regions.”

Keep in mind that global value chain analysis has four

dimensions (Gereffi and Fernandez-Stark, 2011):

input-output structure

geographic scope

governance

institutional context

A good strategy is one that helps mitigate risks—external in

the industry and country and internal to the company—and

uses company strengths to leverage external opportunities.

References

Gereffi, G., & Fernandez-Stark, K. (2011). Global value chain

analysis: A primer. Durham, NC: Center on Globalization,

Governance & Competitiveness (CGGC), Duke University.

Retrieved from

http://citeseerx.ist.psu.edu/viewdoc/download?

doi=10.1.1.447.3521&rep=rep1&type=pdf

Porter, M. E. (1996). What is strategy? Harvard Business

Review, 74(6), 61–78.

Porter, M. E. (2008). The five competitive forces that shape

strategy. Harvard Business Review, 86(1), 78–93.

World Bank (2017). Global value chain development report

2017—Measuring and analyzing the impact of GVCs on

economic development. Washington, DC: World Bank.

Retrieved from

http://documents.worldbank.org/curated/en/44008149942412996

WP-P157880-PUBLIC.pdf

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