Strategic Analysis and Choice

Chapter 4

Porter’s Five Forces Model, Part 1

Barriers to Entry

Introduction

The economic theory about industry structure that you read in chapter 1 implies that profitability in an industry should go to zero in equilibrium (i.e., the accounting profits should equal the opportunity cost of the investment). However, we know that some industries appear to be exceptionally profitable while some are desperately troubled. For example, Table 4.1 lists the top five and bottom five industries in terms of profitability (return on sales [ROS], a profit margin calculation) from 2007 according to Fortune magazine.¹ Clearly, the industries differ pretty widely, but are these interesting results from that economic point of view? What explains the differences ...