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You should enter high-growth industries – right?

Dec 19, 2011 Business Daily, Strategy

“Managers often mistakenly assume that a high-growth industry will be an attractive one. Wrong. Growth is no guarantee that the industry will be profitable. For example, growth might put suppliers in the driver’s seat, driving up the industry’s costs and limiting profitability. Or, combined with low entry barriers, growth might attract new rivals, thereby increasing competition and driving prices down. Growth alone says nothing about the power of customers or the availability of substitutes, both of which would dampen profitability. The untested assumption that a fast-growing industry is a “good” industry, (Michael) Porter warns, often leads to bad strategy decisions.”

JOAN MAGRETTA, blogs.hbr.org (Dec 8, 2011)

Joan Magretta, blogging on the Harvard Business Review site, had an important point to make recently: don’t assume that a high-growth industry is your best bet.

Is that counter-intuitive? Surely we should all go to where the action is? Where consumer demand is strong and industry turnover is rocketing? Not at all, says Magretta, reminding us of the work of Professor Michael Porter in assessing the attractiveness of industries. You should enter an industry where you can build a competitive advantage – not to join the crowd. Just because an industry is good for market leaders does not mean it will be good for you.

Consider these examples. Should you enter the mobile-phone space in Africa, where we have had double-digit growth in recent years and where analysts predict many rosy years of growth to come? I would hope you would be a little circumspect. I hope you would see the formidable task of taking on industry leaders such as Safaricom, with their vast network advantages and grip on customers via must-use products like M-Pesa.

Would you look at the huge profit margins enjoyed by soft-drinks manufacturers like Coca-Cola, and conclude you need to get some of that action? I would hope that industry would be way down on your list of startup options, for you would be taking on a 100-year brand with one of the world’s biggest advertising budgets.

Mobile-phone apps are similarly growing amazingly fast, with 18 billion downloads already in Apple’s iOS ecosystem and 10 billion in Google’s Android world. So you should start up an app-making company, yes? Yes – but only if you have something truly distinctive, attractive or useful to offer. Remember, everyone and their uncle (or nephew, more likely) is trying to build apps now. Some of these people are very good at what they do; most are not. Unless you can be in the former group, don’t bother trying. When you’re up against hundreds of thousands of competing products, you’d better have something really different to tout.

You get the picture. An industry is not attractive because it’s fast-growing or in the news; it’s attractive because you have the capabilities with which to make your mark in it. What Porter said all those years ago is still relevant: study the barriers to entry; the power of customers and suppliers; the intensity of rivalry; and the threat of substitute products destroying the market.

Modern technology has made that last factor particularly potent. Substitutes are arriving from left-of-field at an alarming rate, and whacking many previously complacent industries. Would you care to count with me the number of industries that have been laid waste by the sudden advent of smartphones, tablets and apps? Think about it, and you will realize you need more than the fingers of both hands to count the industries where purveyors of old business models have been brought to their knees.

At the end of the day, strategic advice is not complicated. You compete by being distinctive and innovative and by delivering genuine value to customers, not by joining crowds of competitors. The first step is always to be very, very good at what YOU do.

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