It’s not likely—they’re too large and too consistent. Do some types of businesses attract great managers while others attract only poor ones? Sometimes, but not enough to account for the differences.
In fact, these variations are caused by economic forces that shape each industry’s competitive landscape differently.5 As Michael Porter has shown, some of these relate to the nature of rivalry within the industry itself; others have to do with the balance of power between the industry and its suppliers and customers, substitute products, and potential new entrants. Sometimes the forces are fierce and lead to low levels of industry profitability; other times they’re relatively benign and set the scene for much more profitable outcomes.
The collective impact of these forces on the profitability of individual firms, and, in turn, on industries in which they operate, is called the industry effect. You may be surprised to learn that some and perhaps much of your company’s performance is determined by such forces.6
These competitive forces are beyond the control of most individual companies and their managers. They’re what you inherit, a reality that you have to deal with. It’s not that a firm can never change them, but in most cases it’s very difficult to do. The strategist’s first job is to understand them and how they affect the playing field where competition takes place.
MAKING THE DISTINCTIONS
As suggested by the above chart, industries can be arrayed along a continuum extending from “Unattractive” to “Attractive,” where attractiveness refers to the degree to which industry competitive forces restrict, allow, or even foster firm profitability. The table below identifies the most important of these economic forces and characterizes what they probably would be like in industries at the bounds of such a continuum.7
| Unattractive……… | ………to Attractive | |
| High. Many homogeneous competitors and homogeneous products. Innovations quickly copied. Slow growth. Excess capacity. Price competition. | Rivalry among firms | Low. One or a few dominant, differentiated players. Unique products. Strong brand identities. Rapid industry growth. Shortage of capacity. |
| High. Industry is dependent on a few, concentrated suppliers producing unique products, and Industry is not important source of profitability to suppliers. | Power of suppliers | Low. Many suppliers producing homogeneous products. Price competition and plentiful supply make it easy to procure supplies at reasonable cost. |
| High. Customers have lots of choice among similar products. Low levels of brand awareness. Low switching costs. Low levels of emotional involvement with purchase. | Power of customers | Low. Products are scarce, highly differentiated, and important to customers’ well-being. Customers have limited choice. Brands are strong. |
| Low. Industry is easy to enter and sometimes difficult to exit, creating excess capacity. Strategies of existing competitors can be easily replicated or surpassed. Entry requires low levels of capital, modest scale, and no scarce or specialized resources. | Barriers to entry and exit | High. It is difficult or not economical for new firms to enter your industry. Entry requires economies of scale, product differentiation, high capital investment, regulatory approval, or accumulation of special expertise or experience. |
| High. Wide variety of compelling substitute products are available that meet customers’ needs at attractive relative prices. | Availability of substitute products | Low. Customers have few or no choices of alternative products that could meet their needs at comparable prices. |
Note how closely many of the competitive conditions in furniture manufacturing mirror those in the left-hand “Unattractive” column.
Rivalry among furniture firms is intense, as shown by the high number of firms making similar furniture and by the ability of firms to copy innovations made by competitors.
Suppliers to the furniture industry, such as textile makers, dominate the vendor relationship because no furniture company buys enough textiles to be an important customer.
Customers in the industry are powerful because furniture purchases are highly postponable, products are long-lived and commodity-like, and customers are not brand sensitive.
Entry barriers are low, meaning that new firms can flood in and pull down prices if industry conditions ever become more attractive. On the other hand, the industry can be difficult to exit, especially for the many family firms that have few alternative options, making excess capacity slow to leave the industry.
Substitute products abound. New furniture must compete for the customer’s dollar with countless alternatives—including used furniture or hand-me-down furniture passed from user to user. Since many customers consider furniture a discretionary purchase, it must also compete with a plethora of products such as televisions and sound systems that customers are more excited about and consider to be a better value for their discretionary dollars. Even when furniture prices lagged increases in the consumer price index, sales did not respond.
How do you react to the existence of these forces?
It isn’t a happy lesson for many executives I teach. It seems to say, “Your prospects are predetermined—the game is up—or, if not up, a big chunk of it is out of your control.” Action-oriented executives, I find, prefer not to think of themselves as in the grip of outside forces. They prefer to believe in free will, not determinism. The possibility that their industries might drive or heavily influence their own performance isn’t near the top of their minds. As proactive leaders and believers in the power of management, they tend to focus on what they can control, while ignoring or underestimating what they cannot.
REJECTING THE MYTH
Ironically, the most successful and admired leaders, the titans of business, understand the profound significance of competitive forces outside their control. They know the crucial importance of picking the right playing field. They don’t buy the management myth that a truly good manager can prevail regardless of the circumstances.
Look at Jack Welch, Fortune magazine’s “Manager of the Century.” You probably don’t remember that when he took over General Electric, Welch sold off more than 200 businesses worth more than $11 billion and used that money to make more than 370 acquisitions. Why? He wanted out of industries where conditions were too negative, where he thought it would be too hard for GE to flourish. “I didn’t like the semiconductor business,” he said. “I thought it was too cyclical and it required too much capital. There were some very big players in it and only one or two were making any money on a sustained basis…. [Exiting that business] allowed us to put our money into things like medical equipment, power generation, all kinds of industries where we changed the game….”8
A comment from the Sage of Omaha himself, Warren Buffett, caps the point:
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.9
Buffett and Welch, two of the strongest managers on record, recognize that industry matters a lot. They understand that a significant measure of a firm’s success depends on competitive forces beyond a manager’s control, and they use that knowledge to their own advantage—by picking playing fields where they can win and, within those fields, carefully positioning their businesses to work with, not against, the forces.
BUT WHAT ABOUT …?
Despite such counsel, the myth of the super-manager lives on for many executives. It’s reinforced in practice just often enough to give it credence. Sometimes, even in the toughest lines of business, there is a plan that works. Individual firms on occasion have not only achieved great success in industries where most others have failed, but they’ve even changed the basic competitive
