The Strategy Pathfinder, 3rd Edition

3Industry Forces

When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact.

Warren Buffett

If your organisation was in the security and brokers industry between 1992 and 2006, it is likely that you would have sustained a healthy return over this period, as the average return on investment capital (ROIC) for the sector was 40.9%. However, had you been in catalogue and mail order houses your organisation may well have struggled to achieve much more than the average of 5.9% ROIC. This raises the question: why is it that some industries¹ seem to be consistently more profitable than others?

The variation in industry returns (ROIC) for selected industries, between 1992 to 2006, is shown in Table 3.1. This variation can be explained by each industry’s characteristics; the dominant structure, the evolutionary phase and the underlying competitive and cooperative forces. For instance, in the soft drink industry, a duopoly of Coke and Pepsi allowed these two organisations to dominate all other competitors and have very significant power over customers. This industry was clearly more profitable than the poor old airline industry, which consistently failed to earn its 7–8% cost of capital year in and year out, largely because of fierce competition between companies that prevented them from generating significant profits.

Table 3.1 Annual average ROIC² 1992–2006 selected industry ...