Why are some industries more profitable?

何一品 2017-08-13

It is a very common phenomenon in our daily lifes, that different industry has different profit rate. Some are much higher, and some are much lower. Differnet margin rate means different salary, so it is closely related to you and me. Here is one graph showing several common industries margin level. There are three differnet groups in this graph. On the top level is tier one. In this group are financial institutions and automotive companies. On the middle level is tier two, including high technology, real estate, energy, etc. On the bottom level is tier three. In this part, there are traditional service, manufature, etc. On this picture, the top one is too much higher than the bottom one. So, here is a question, why are they so different? There must be some reasons behind. Here, I would like to introduce one thought model, five forces model, which is very popular in academic class or bussinees analysis. This model was put forward by Porter, in 1980s. This model is a very simple thinking to understand one industry. There are 5 forces to determine one industry's margin rate. They are existing competitors, potential entrants, substitutes, buyer poower and supplier power. If these 5 forces are all powerful, it is not good news for one industry and company. On the other hand, if none of thes 5 forces is powerful, congratulations, it is extremly good news. However, all these factors are just considered at one moment. We always should take the future into our account. There may be some changes in future. What are the changes? How do these changes effect? Let's look one example. Here is a analysis of our Chinese local bank. At present, almost all 5 forces are all in its favor. The first one, existing competitors are strongly restricted by regulators. The price, interest rate is controlled. so, when you go to Bank of China or agricultral bank, you cannot tell what different. Perhaps just one thing, the convience is different, which one is closer to you. Potetial entrants are all controlled. Not every company can register a bank. The entry is very strongly controlled. How about substitutes? It almost had no substitues, but now, for us common people, we can put money in Yu'ebao or Wechat funds. In this degree, Alipay and Wechat do change something in bank industry. How about buyer and supplier bargin power? It is not easy to change the present conditions. According to our above analyses, we can see why our banks can make so much money. and why so many people want to enter banks and other financial institutions. But one more thing, all these analyses are based present conditions, how about the future? Is there anything changing? It depends on our goverment how to reform this banking system. But don't worry, the slary of bank won't be same to us common workers.


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