# Strategic Logic **J. Carlos Jarillo**  --- _Analyse activities, not industries._ "The concept of 'profitability of a sector' is intrinsically erroneous, since this profitability is only the sum of the profitability of the activities." That one line collapses most industry analysis. We talk about margins in retail or margins in software as if these were meaningful. They're not. Entry barriers don't protect industries; they protect specific activities within industries. Economies of scale don't apply to a business as a whole but to particular activities within it. --- A car manufacturer has many production plants but typically one design centre. The minimum efficient size of designing automobiles is completely different from the minimum efficient size of assembling them. These are different businesses with different profit structures, even though they're housed in the same company. Analysing "the auto industry" obscures this. Any economic activity conceptually separable from the rest is a distinct business with its own profitability structure. Owning a property and running a restaurant on it are two separate businesses. The restaurant might lose money whilst the landlord profits handsomely, not from gastronomic prowess but from property ownership. The right question is never "is this industry attractive?" but which activities within it have sustainable singularity. This is [[Economics vs playbooks|economics before playbooks]]. --- **Configuration shapes everything.** Which activities do you perform yourself, and which do you leave to others? It's a [[Real choices|real choice]], yet managers treat it as a cost problem ("which is cheaper, making or buying?") when the real question is what kind of company you want to be. The golden rule: an activity that cannot be done better or cheaper than competitors, in a sustainable fashion, adds no value. Companies end up keeping unprofitable activities and subcontracting profitable ones, exactly backwards, because factories are there and need to be kept busy. --- **Vertical integration only makes sense if combining two activities within one company increases quality or reduces costs.** The mere fact that one company owns two links in a chain doesn't improve the profitability of either link. The trend across many industries is toward stratification: specialisation at the activity level. Personal computers went this way. Automobiles are going this way. The alternative to integration isn't chaos, it's coordination. McDonald's doesn't own its restaurants but coordinates them carefully, capturing the advantages of integration without the disadvantages. --- **The "race to volume" strategy often destroys value.** Price below cost, grow fast, move down the cost curve, drive out competitors, then profit. The logic sounds impeccable, except every well-capitalised competitor follows the same logic. With everyone pricing below cost and no one exiting, the business becomes ruinous for years. A classic [[Growth market traps|growth market trap]]. The winners in new industries are often the patient entrants who attack uncontested segments first, the logic of [[Niches]]. Toyota started in small, inexpensive cars where customers were price-sensitive and willing to try unknown brands. The leaders' first reaction was dismissal: "let them have that segment, it's not profitable." Toyota used that beachhead to build the capabilities that eventually let them compete directly. --- **Companies can buy profits but not profitability.** Acquiring a profitable business costs more than it returns, otherwise it wouldn't be profitable. Growth through acquisition without genuine synergies is value destruction dressed as strategy. Mergers only create value when they reach minimum efficient size, unlock genuine synergies, or withdraw capacity from an oversupplied market. The third is the one nobody admits publicly. Many mergers presented as "economies of scale" are really about reducing industry capacity so margins can recover. --- Jarillo's most useful observation is that almost all companies have golden nuggets buried somewhere: activities or customer segments far more profitable than average. The task is to find them through rigorous activity-level analysis, not to impose plans from above. Imitation of competitors and vague statements about "being leaders" don't cut it. ---