Playing To Win

The Role of Industry in Strategy

Set a Strategic Goal of Shaping Yours

Source: Michael E. Porter, 1980

I had another question/provocation recently on the role of industry in strategy. They keep coming, along with specific requests to write something on the subject. So, I thought I would initiate Year II of the Playing to Win/Practitioner Insights (PTW/PI) series with a piece on The Role of Industry in Strategy: Set a Strategic Goal of Shaping Yours.

The Trendy Critique

The trendy critique these days holds that strategy assumes that industries are fixed and stable, and you should find one that is structurally attractive, get advantage there, and milk it for all you can. The notion is generally attributed to Michael Porter, of Five Forces Model fame, despite the fact that he never said or even implied such a thing.

In contrast, the supposedly enlightened way of thinking about strategy is to recognize that because industries are ‘continuously morphing,’ there is no such thing as competitive advantage anymore. Thus, you should be ‘continuously reconfiguring’ rather than doing this terribly old-fashioned thing called strategy because, apparently, it is old-fashioned!

Most readers know I have worked with P&G for a long time, 35 years and counting, in fact. The Tide brand managers over those 35 years, plus the 40 years before that, would find hilarious the idea that their brand was incapable of sustaining competitive advantage when Tide has been the top laundry detergent in the US for the past 75 years — and arguably may now be the strongest it has been in those three-quarters of a century. The same would apply to the Head & Shoulders brand managers over the past 60 years.

And I can’t help wonder what Facebook, Amazon, Netflix and Google would think if they were told their advantages are fleeting because their industries have morphed so continuously that each will soon be in the ashbin of history. Or great old-guard companies like Vanguard or Four Seasons or Southwest for that matter — with their strategies, industries and competitive advantages that have been around for around half a century for each of the three.

Are their industries completely stable, so they haven’t had to do a thing to maintain their leading positions? No. But have their core competitive advantages had to change dramatically? Nope. Not for any one of the abovementioned winners.

So, let’s dispense with the trendy critique and instead reconfirm that winning in your industry matters and can matter for a long, long time — for generations in some cases.

But How Should You Define Your Industry?

A get a lot of questions about and fretting over the question of how to define one’s industry. The general concern tends to be that industry definitions are too narrow and rigid. This is, of course, not a particularly new idea. Theodore Levitt made that critique in 1960 in one of the most famous Harvard Business Review articles of all time, Marketing Myopia, in which he used the example of the passenger railway business generating its own demise by considering its competition to be other railways and not paying attention to alternative transportation — like cars and planes.

Michael Porter tends to get beaten up for this too with folks criticizing him for his Five Forces Model considering competition narrowly. Again, I come away wondering if his critics actually read his stuff prior to criticizing. A quick perusal of the model reveals that, per Levitt, if other railways are the only actors included in the Rivalry Among Existing Competitors box, then cars and planes will be included in Threat of Substitutes box. And future kinds of players in Threat of New Entrants. If you actually read Porter, he tells you that if you want to understand your strategy context, you had better consider all three of Rivalry, Substitutes and New Entrants.

Maybe because I worked a lot with Mike in the olden days, I am pretty lackadaisical about defining the boundaries of industries for purposes of strategy. It recalls for me the tag line from the old Fram Oil Filter commercials: pay me now or pay me later. You can define your industry narrowly — say, steel — and thereby show it as having less intense Rivalry. But then aluminum and ceramics have to be in the Substitute box, and you have a huge threat from them. And even further, one always has to think about Threat of New Entrants, as the traditional steelmakers should have done with respect to scrap steel/mini-mill entrant, Nucor.

Of course you can’t just punt on industry definition in strategy because you can’t develop a strategy in a vacuum. You do need some sort of definition of the playing field on which you plan to compete in order to develop strategy. But I am quite flexible in exactly how that playing field is defined. The definition just needs to have self-correcting elements to it.

For example, the theory of one’s industry can be that the industry is just me. Lots of entrepreneurs think of it that way. They say: “I am truly unique.” I don’t try to convince them that they aren’t, and that they are part of a bigger industry. What is the use? I focus instead on getting them to think about the task of recruiting customers out of other industries into theirs. That has the same effect as defining their industry more broadly. They have to compete with players that they see as being in other industries to get the customers of these other players to defect to them.

Sometimes the definition can be less singularly extreme but still very narrow. In this case, executives do acknowledge direct competition but define their competitive set narrowly. Again, I don’t waste time fighting their narrow definition. I just make sure that they think carefully and robustly about substitutes and how their strategy must consider the threat from them.

If instead they define their industry overly broadly, I get them to focus on the strategic group within which they compete most directly and intensely, because winning there should be their first task.

My overall approach is to expend my energy on taking account of any vulnerabilities in the industry definition rather than directly fighting the definition itself.

It’s About the Role of Strategy in Industry

There is a much more important task than haggling or obsessing about industry definition. Instead, your focus should be on working to influence your industry, on shaping it to better benefit your strategy. That is because all good strategies have the effect of influencing/evolving/shaping their industry.

Did Vanguard win in a way that maintained the boundaries and shape of its industry? No. It created a gigantic new industry: index mutual funds. Did Southwest Airlines win in a way that maintained the boundaries and shape of its industry? No, it created a very attractive substitute for the Greyhound Bus. How about Four Seasons? No, it heralded the splitting of the hotel development industry from the hotel management industry.

Why is Tide on top after 75 years? It has kept shaping its industry to its own advantage — and always also to the benefit of consumers. At its inception, it became the default detergent as the automatic washing machine penetrated American households by giving out a free box of Tide with every machine sold. Later, it became the dominant liquid detergent, driving the shift from powdered to liquid detergent. Still later, it showed that detergent and bleach aren’t necessarily two distinct products if it is more convenient for it to be one. Most recently in converted the entire high end of the industry from pourable liquid to uni-dose pods. Tide won by influencing the shape and contours of its industry in ways that strengthened its position with consumers by making the lives of consumers better.

I am sure there are examples of great companies that won without shaping their industries meaningfully. But none come to mind, which generally means they are the exceptions that prove the rule!

Practitioner Insights

It is largely a waste of time to argue about industry definition. Just make sure you have a definition that is self-correcting by taking into account the aspects that you don’t include in the industry. If you think the definition is overly narrow, make sure that you consider the role of substitutes and potential entrants. If you think it is overly broad, focus attention on winning the narrower battle first before tackling the industry broadly.

Be flexible in your industry definition but inflexible in your theory of winning. The job of strategy is to offer a superior value proposition to a target set of customers. There are lots of ways to conceptualize that target set — the whole market, a big chunk, or a tiny slice. All will be workable if you have discipline on finding a way to win, not to just play.

And a key to winning in the long term is to shape your industry in a direction that benefits your strategy. The worst thing to do is to simply sit back and let the industry in which you operate evolve in whatever way the relevant forces drive or more dangerously, in a way that a key competitor seeks to evolve it. That will put your strategy perpetually on its back foot — always needing to respond. If your strategy doesn’t shape the industry in which you compete, somebody else will be evolving it in a way that benefits them. So, take the task of shaping your industry’s evolution as seriously as you take competing today.

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Roger Martin

Professor Roger Martin is a writer, strategy advisor and in 2017 was named the #1 management thinker in world. He is also former Dean of the Rotman School.