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02 A Template For Structural Analysis of An Industry-1
02 A Template For Structural Analysis of An Industry-1
You can use the following template for analyzing the structure of an industry. It
requires you to rate the attractiveness of an industry on a 5-point scale for several factors
relating to each of the five forces in Porter’s (1980) model. (A 7-point or a 10-point scale
would perhaps be even better in that it would allow finer discrimination between two
businesses with different levels of attractiveness. But the 5-point scale is relatively much
easier to use.) To help you in the ratings, the template provides the anchors at the two ends of
the scale for each factor with examples of industries corresponding to the anchors.
You will note that we have included separate sections in the template for exit barriers
and government. The former contributes to rivalry among competitors (and is, therefore, not
a sixth force). The latter, according to some, should be treated as the sixth force, although
Porter says the effect of government on an industry is felt through one or more of the five
forces.
If you want, you can attach different weights to different forces and also to different
factors within each force. If an industry has different segments that are structurally different,
you can separately analyze the attractiveness of each segment. You can also analyze the
changes in industry structure by using the template at two different points of time (for
instance, today and five years from now) to obtain greater insight into likely opportunities and
threats that you can expect from the industry environment. To reduce the element of
subjectivity, you can get the attractiveness evaluated by several colleagues and arrive at
average scores. Even the weights of different factors and forces could be based on the opinion
of your colleagues and you could attach greater weight to the opinion of colleagues with
greater expertise. Use your creativity to benefit from this tool.
You can use the remarks column to annotate your ratings. For instance, consider the
first factor in Table 1 (number of competitors). As a rule of thumb, industries in which the
combined market share of the largest four firms (called 4-firm concentration ratio) exceeds
70% are very profitable. Concentration ratios between 60%-70% are associated with average
and those below 60% with low profitability. The 4-firm concentration ratio in the wide-bodied
jetliner industry is 100% and in the grocery store business almost zero. Thus, you can support
the evaluation of your industry by giving the 4-firm concentration ratio.
Table 1: Rivalry among competitors
Attractiveness Remarks
Low High
1 2 3 4 5
Attractiveness Remark
Low High
1 2 3 4 5
Attractiveness Remark
Low High
2
1 2 3 4 5
Attractiveness Remark
Low High
1 2 3 4 5
Attractiveness Remark
Low High
3
1 2 3 4 5
Attractiveness Remark
Low High
1 2 3 4 5
4
Contribution High PC Low end Low
to quality packaging
Low Talcum powder High
Contribution Oil refining
to cost
Attractiveness Remark
Low High
1 2 3 4 5
Attractiveness Remark
Low High
1 2 3 4 5
Barriers to entry
Barriers to exit
Power of buyers
Power of suppliers
Threat of substitutes
Government action
Overall attractiveness
5
Reference:
Porter, Michael E. (1980) Competitive Strategy, New York: The Free Press.