Hi, guys, welcome back to Entrepreneurial Strategic Management. This is a course in which we're learning all about how to start and maintain a successful business. We're asking a key question throughout the course. We're trying to understand what are the factors that are involved or necessary for creating or maintaining success in your business or other organization. If you recall and module one, we talked all about the importance of the external environment. We said that the most important factor from that framework that we looked at last time, called Porter's Five Forces, in determining a company success is the industry in which it operates. In other words we said you'd be successful as a company if you were in the right sector or if you're in the right industry, and so therefore we said it's much less the case that we find successful companies, it's more so the case that we find successful industries, or successful sectors. And we have seen over time that some industries such as the pharmaceutical or the petroleum industries do seem to be highly profitable as an industry, and therefore the companies inside them. And we've seen other industries such as the airline that tend to struggle and recall that we're asking about success, measuring it by things like survivability. Does the organization or company still exist? Is it making a profit? And we've said, there is no 100% for sure, successfully, predictable answer to this question. What we're doing is giving our best attempt to answer these questions using the most popular, or the most compelling frameworks that exist. And Porter's Five Forces surely is one of the most important models that is used. One of the criticisms, if you'll recall, of Porter's Five Forces is that it can't help you predict which company will be successful. You tell me that you're starting one, I can't say yes, it'll work. If you could come up with a company that had positive aspects on each of these forces, I can tell you that it probably will be successful. But still you've gotta be in the right industry or the right sector. [COUGH] As you heard that model described, you might have thought to yourself, well, I can think of companies in unsuccessful, or unprofitable industries, that in fact, do make a profit. You might have also thought to yourself, I can also come up with some companies that are losing money, even though they're in a successful or profitable industry. So it's not the case that Porter's Five Forces is the perfect answer for explaining business or corporate success. Let me give you an example. In the United States there's a famous airline called Southwest, Southwest Air. They have been in existence for about 40 years and have pursued some very interesting strategies that we'll discuss throughout this module. And Southwest has succeeded, despite being in an unprofitable industry. If you look at, and I encourage you to do that, excuse me, if you look up data or statistics over time of profitability in the United States airline industry, I think you'll see an average loss for many years. So most of the companies, most of the airlines in the industry are losing money. Somehow though, Southwest Airlines broke that mold, or broke that pattern and was successful. It was making a profit despite being in this industry that had Negative Five Forces. So does that disprove Porter's Model? Well it certainly provides some evidence that it's not 100% correct. So it's possible to be successful, even if you're in a bad industry, or if it's possible to be unsuccessful even if you're in a profitable industry, how do we explain that? What we're trying to understand is something you might call sustainable competitive advantage. We're trying to understand how it is that some companies seem to sustain over time an advantage over their competitors. And they do so by doing something better than competitors that meets a customer's needs, that adds value to their lives, that is in fact difficult to imitate or substitute for. Therefore, we're trying to find something unique that the companies are doing that stands out, even in sometimes an unprofitable industry environment. And so Southwest would clearly be an example of that type of firm. So this will be our discussion, or our attempt to try to understand company success in this module will be by looking at sources of competitive advantage, sustainable competitive advantage. So in part two, we'll pick that back up and try to understand that a little bit more.
