# Activity-Level Analysis ## The Idea in Brief Profitability belongs to activities, not industries. Entry barriers don't make entry to an industry difficult—they make entry to specific activities within the industry difficult. Analysing "the profitability of retail" or "margins in software" is a category error. The right unit of analysis is the individual activity. --- ## Key Concepts ### The Category Error We talk about industries as if they have inherent profitability. "Retail is low margin." "Software is high margin." But industries are statistical conveniences, not strategic realities. Within any industry, some activities are highly profitable and others destroy value. Aggregating them obscures where advantage actually lives. ### Entry Barriers Apply to Activities Economies of scale, patents, brands, network effects—these don't protect industries. They protect specific activities. 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. ### Conceptual Separability Any economic activity that is 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 property owner profits—not from gastronomic skill but from real estate. ### Configuration Decisions The decision of which activities to perform internally versus leaving to others (configuration) is possibly the most important strategic decision. It determines what business you're actually in and therefore your profit potential. Yet these decisions are often made implicitly or treated as cost problems when they're really identity decisions. --- ## Implications **In strategic analysis:** Stop asking "is this industry attractive?" Ask "which activities within this value chain have sustainable advantages, and am I on the right side of that line?" **In competitive positioning:** Your profitability comes from activities where you have sustainable singularity—doing something better or cheaper than competitors can replicate. Most of what any company does is necessary but not value-creating. **In M&A:** Mergers often destroy value because they combine profitable and unprofitable activities without examining them separately. "Synergies" are often fiction that hides activity-level losses. **In vertical integration:** Integration only creates value if performing two activities together increases quality or reduces costs versus separation. Owning both links doesn't automatically improve either. **In outsourcing:** The question isn't "what's cheaper?" but "which activities have profit potential we should own, and which don't?" Companies often keep unprofitable activities and outsource profitable ones—exactly backwards. --- ## Sources - [[Strategic Logic]] — Jarillo's core framework; entry barriers exist at activity level, not industry level - [[7 Powers]] — The powers attach to specific activities (counter-positioning, process power) not whole companies - [[Playing to Win]] — "Where to play" is partly about which activities to own - [[Better, Simpler Strategy]] — Value creation happens at activity level; firm-level analysis misses granularity