How Much Does Industry Matter?

1. How Much Does Industry Matter? • Firm performance depends a great deal on the attractiveness of the industries in which the firms compete. • See Exhibit 1 on next slide. • Regression analysis on almost any industry shows that the variation in the average performance of all firms in an industry will explain about 20% of the variation in the performance of any single firm in that industry.

2. Exhibit 1: Average Return on Assets of Different Industries

3. How Much Does Industry Matter? (cont.) • One cannot generalize that the “industry is all that matters.” • Returns vary in any industry from year to year (see exhibit 2 on next slide). • Some industries are more cyclical than others. • Evidence indicates that the difference between the performance of the highest- and lowest-performing firms in any industry will be 6 times greater than the difference between the performance of the highest- and lowest-performing industry (see Exhibits 3 [A] and [B]).

4. Exhibit 2: Average Return on Assets in the Automobile Industry: 1993 - 1997

5. Exhibit 3 [A]: ROAs of High- and Low-Performing Firms in the Steel Industry

6. Exhibit 3 [B]: High- and Low-Performing Firms in the Pharmaceuticals Industry

7. The Five Forces Model • Devised by Michael Porter of Harvard. • Examines the 5 forces which influence the structure of industries • Framework suggests that industry structure will impact the competitive behavior of firms in that industry. • Also suggests that firm conduct will influence the average performance of firms in that industry. • As intensity of forces increases, the industry environment becomes more hostile and overall industry profitability will decline