Let’s face it: in most industries, firms pretty much do the same thing

In the field of strategy, we always make a big thing out of differentiation: we tell firms that they have to do something different in the market place, and offer customers a unique value proposition. Ideas around product differentiation, value innovation, and whole Blue Oceans are devoted to it. But we also can’t deny that in many industries – if not most industries – firms more or less do the same thing.

Whether you take supermarkets, investment banks, airlines, or auditors, what you get as a customer is highly similar across firms. 

  1. Ability to execute: What may be the case, is that despite doing pretty much the same thing, following the same strategy, there can be substantial differences between the firms in terms of their profitability. The reason can lie in execution: some firms have obtained capabilities that enable them to implement and hence profit from the strategy better than others. For example, Sainsbury’s supermarkets really aren’t all that different from Tesco’s, offering the same products at pretty much the same price in pretty much the same shape and fashion in highly identical shops with similarly tempting routes and a till at the end. But for many years, Tesco had a superior ability to organise the logistics and processes behind their supermarkets, raking up substantially higher profits in the process.
  2. Shake-out: As a consequence of such capability differences – although it can be a surprisingly slow process – due to their homogeneous goods, we may see firms start to compete on price, margins decline to zero, and the least efficient firms are pushed out of the market. And one can hear a sigh of relief amongst economists: “our theory works” (not that we particularly care about the world of practice, let alone be inclined to adapt our theory to it, but it is more comforting this way).
  3. A surprisingly common anomaly? But it also can’t be denied that there are industries in which firms offer pretty much the same thing, have highly similar capabilities, are not any different in their execution, and still maintain ridiculously high margins for a sustained period of time. And why is that? For example, as a customer, when you hire one of the Big Four accounting firms (PwC, Ernst & Young, KPMG, Deloitte), you really get the same stuff. They are organised pretty much the same way, they have the same type of people and cultures, and have highly similar processes in place. Yet, they also (still) make buckets of money, repeatedly turning and churning their partners into millionaires.

“But such markets shouldn’t exist!” we might cry out in despair. But they do. Even the Big Four themselves will admit – be it only in covert private conversations carefully shielding their mouths with their hands – that they are really not that different. And quite a few industries are like that. Is it a conspiracy, illegal collusion, or a business X file?

None of the above I am sure, or perhaps a bit of all of them… For one, industry norms seem to play a big role in much of it: unwritten (sometimes even unconscious), collective moral codes, sometimes even crossing the globe, in terms of how to behave and what to do when you want to be in this profession. Which includes the minimum margin to make on a surprisingly undifferentiated service.

2 Comments on “Let’s face it: in most industries, firms pretty much do the same thing”

  1. srp says:

    Since the 1980s, this “puzzle” was eliminated by non-cooperative game models showing that even homogeneous competitors can support non-cutthroat Nash equilibria in repeated games. There are at least three classes of models that support such outcomes: supergames (where today’s pricing is conditioned on the past behavior of both parties), games of incomplete information (where even a small probability that the other player is an irrational cooperator can cause two non-cooperators to sustain positive margins), and quick-response games (where rivals can react to a price cut faster than buyers do).

    The problem with the theory now is that it doesn’t pin down pricing outcomes enough to be falsifiable. Nor, in practical terms, does it move us much beyond Fellner’s Competition Among the Few from the 1950s. There was an entertaining dialogue on this point back in the 1980s in the Rand Journal of Economics between Frank Fisher (“Games Economists Play”) and Carl Shapiro (“The Theory of Business Strategy”).

  2. Indy Neogy says:

    Aren’t the profit margins of the big four largely founded on the nexus between regulation (company accounts/audit) and the guild system (chartered accountants etc.) Now the existence/survival of four is a bit mystifying. Particularly because there was an implosion in the industry (Arthur Andersen.)

    I suspect in part it’s historical/geographical accident. However, it may be bound up with the preferred rotation when there’s an oligopoly of supply – some similarities to defence contracting.

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