It is easier to earn outsized investment returns in some industries over others — I agree with that conventional wisdom. As an investor or entrepreneur, it often pays off to think hard about which industries to enter. If you have a choice, why not increase your odds of success by selecting a market or industry with superior returns? We have discussed this previously with this chart of the most profitable industries and thinking about persistently high returns through competitive advantage.
As a thought-provoking counter point, Evan Hirsh and Kasturi Rangan of Booz & Company published some research in the Harvard Business Review last year that suggests the variance in company performance within an industry can be larger than the variances between industries. The full article is here. Once you are already a CEO or a business owner in a certain industry, Hirsch and Rangan recommend it is better to focus on improving your performance within that industry rather than trying to change to a new industry through acquisitions or growth initiatives.
Investment Returns 2001-2011 by Industry
“Many manager focus on finding a ‘better’ industry to get into. But if you look at the total shareholder returns within various industries over the past decade, you’ll see that the median performances (the yellow hash marks) are strikingly similar. What differs is the range of returns (the pink bars). So, instead of switching industries, concentrate on moving to the top of your own,” write Hirsh and Rangan.
This advice rings true to me. Every business goes through difficult times — it is inevitable. During those times, it is sometimes tempting to change a company’s focus from today’s poor industry or segment to another market. CEO’s often think if we can just get out of this terrible industry, we could earn better investment returns. It is extremely difficult to switch industries, particularly because many CEO’s do not realize:
- Managerial talent is not fungible. A company and its management that are effective in one arena will not necessarily be effective in a new arena.
- Today’s “hot” industry will not always be so. By the time a company pivots to the new industry, the dynamics of that industry may already have changed.