MGT Notes

Reference: Strategic Management (5e) – Frank T. Rothaermel (Pg 81)

A firm’s performance is determined by two main factors: Industry Effects (20%) and Firm Effects (55%). The remaining 25% is attributed to business cycles and other effects.

An industry is defined as a group of existing firms with access to the same set of suppliers and buyers. The structure of an industry is defined by a set of entry and exit barriers, number and size of companies and the types of products and services offered. An industry analysis aims to identify the profit potential of an average firm and derive each firm’s strategic position. Thus, industry effects study the underlying economic structure of the industry, since firm performance is related to the industry in which it operates.

Firm effects are related to the actions of its leaders. The gap between the value a firm provides to its customers and the cost at which it does so, defines its strategic position. A larger gap leads to a greater competitive advantage.