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.

Exhibit 1: Average Return on Assets of Different Industries

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]).

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

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

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

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