A short YouTube lecture examining why firms in different industries display large profitability differences. Uses comparative examples (Eli Lilly vs Air Canada) and attributes variation to industry structure and competitive forces such as patents, product differentiation, capacity, supplier bargaining, and customer switching.
28%
2.5%
Hi everyone. I'm thinking about starting a series can be called learning basis. As a computer scientist today, I'm studying why some companies are far more profitable than others. The pharmaceutical company Lilly generated return on investment capital of 28% from 2005 and 2021. Over the same period, Air Canada produced an ROIC of just 2.5%. Such large differences in profitability are commonplace. Understanding their roots is crucial for strategists. Differences in industry structure shed light on such differences in performance. To a certain extent, Lilly was more profitable than Air Canada during this period. Because the pharmaceutical industry is structurally more attractive than the airline industry, rivalry among pharmaceutical companies is muted by factors such as patent protection, product differentiation, expanding demand. In contrast, rivalry among airlines is fierce, fueled by limited differences among services, excess capacity, and the ability to shift plans to routes. Where others are making money. Many pharmaceutical users hesitate to switch products or brands. Where airline passengers are often willing to switch among airlines in order to get even slightly better price. Many pharmaceuticals are made from commodity with little labor effort. Little labor input with suppliers such as union and aircraft manufacturer exercise some power over airlines. Such contrast in industry level competitive forces are one reason for the variation in profit levels of firms in different industries.
