## Industry Attractiveness

### Assessing Industry Attractiveness

Strategists assess industry conditions to determine whether the industry presents an attractive business opportunity for the organization.

Key factors to consider:

Factor	Question to Ask
Growth potential	Is the industry futuristically viable?
Competitive conditions	Does competition permit adequate profitability? Will forces strengthen or weaken?
Industry-level problems	How severe are the problems confronting the industry?
Cross-industry synergy	Does participation enhance the firm's success in other industries?
Exploiting weakness	Is there potential to capitalize on the vulnerabilities of weaker rivals?

### General Proposition

Above-average profit prospects → Attractive industry
Below-average profit prospects → Unattractive industry

> Key nuance: Attractiveness is relative, not absolute. An industry unattractive to weak competitors may be highly attractive to strong competitors.

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## Experience Curve

### Concept

Unit costs decline as a firm accumulates experience (measured by cumulative volume of production).

> Based on the principle: "We learn as we grow."

### Sources of the Experience Effect

Source	Mechanism
Learning effects	Workers and managers become more efficient over time
Economies of scale	Larger volumes spread fixed costs over more units
Product redesign	Simplification and standardization reduce costs
Technological improvements	Process innovations lower production costs

### Features of the Experience Curve

Organizations gain experience as they grow → cost advantage over newer rivals
Experience is a key barrier to entry for new competitors
Large, successful organizations possess a stronger experience effect
As cumulative output doubles, unit costs fall by a predictable percentage

### Strategic Significance

> The experience curve is a barrier for new firms contemplating industry entry — established players have inherently lower costs built up over years of accumulated production.

Worked example

### Example 1

Experience Curve as Entry Barrier — Semiconductors:

A new semiconductor fab faces extremely high per-unit costs versus an established player like TSMC. TSMC's decades of accumulated production experience results in dramatically lower per-unit costs through learning effects and process refinements. A new entrant cannot match these costs without years of production — making the experience curve a powerful entry barrier.

### Example 2

Industry Attractiveness — Pharmaceutical Industry:

A market analyst reviewing pharma would note: high growth potential (aging global population), strong IP protection reducing rivalry, high entry barriers, but significant regulatory hurdles. For a large multinational with R&D capability — attractive. For a small startup without IP expertise — unattractive. Same industry, different assessment depending on the firm's strength.

⚠️ Common exam mistakes

Confusing the experience curve with economies of scale — economies of scale is just ONE of multiple sources of the experience effect; the experience curve is broader.
Assuming industry attractiveness is universal — it is always relative to the specific firm's strengths and capabilities.
Thinking the experience curve only applies to manufacturing — it applies to any activity that is repeated, including services, sales, and software development.

Reference:

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Industry Attractiveness Assessment and the Experience Curve

Worked example

⚠️ Common exam mistakes