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
- 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.
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/440081499424129960/pdf/117290-WP-P157880-PUBLIC.pdf