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Corporate Strategy and Policy

A Template for Structural Analysis of an Industry

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

Prepared by Deepak K. Sinha, Indian Institute of Management Bangalore 1/1/2003

Revised

and those below 60% with low profitability. of competitors Industry growth Fixed cost Differentiation Switching cost Openness of terms of sales Excess capacity Large Grocery store Vinyl record Steel Sugar Diskette Used car 2 3 4 High 5 Wide bodied jetliner Internet browser Real estate agency Beer Software Stocks Small Remarks Slow High Low Low Secret Fast Low High High Open Large Residential property in Bangalore Internet browser Office space in South Mumbai Small Strategic stakes High Part-time coaching Low Table 2: Barriers to exit Attractiveness Low 1 Asset specialization Cost of exit Government restrictions High Steel 2 3 4 High 5 Automotive gears Tea stall Grocery store Small Remark High High Steel Public bus service in UK Small Small 2 . you can support the evaluation of your industry by giving the 4-firm concentration ratio. Table 1: Rivalry among competitors Attractiveness Low 1 No. The 4-firm concentration ratio in the widebodied jetliner industry is 100% and in the grocery store business almost zero. Thus.

Table 3: Barriers to entry Attractiveness Low 1 Economies of scale Product differentiation Brand identity Switching cost Access to channels of distribution Capital requirement Access to technology Access to raw material Government protection Small Low Tea stall Sugar 2 3 4 High 5 Oil refinery Beer Large High Remark Low Low Easy Sugar Diskette Newspaper Cigarette Software Petrol High High Limited Small Easy Tea stall Generic drugs Distilled water Tea stall Oil refinery AIDS medicine Ivory Large Restricted Easy Restricted None Public bus in UK Substantial Table 4: Threat from substitutes Attractiveness Low 1 Availability of close substitutes Switching cost High Fountain pen 2 3 4 High 5 AIDS medicine Customized Software Suburban trains in Mumbai Low Remark Low Diskette High Substitute’s price-value Better Vinyl record Worse 3 .

Profitability of the producers of substitutes High Vinyl record TransAtlantic flight Low Table 5: Bargaining power of buyers Attractiveness Low 1 Number of buyers Availability of substitutes Switching cost Buyer’s threat of backward integration Industry’s threat of forward integration Contribution to quality Small Air bags for cars Fountain pen 2 3 4 High 5 Toothpaste Large Remark Many AIDS medicine Software Cars Few Low High Diskette Air bags for cars High Low Low Air bags for cars Oil refinery High Low Low end packaging Semiconductor chips Paper clips High Contribution to cost Buyer’s profitability High Housing Low Low Public bus service Luxury cars High 4 .

Table 6: Bargaining power of suppliers Attractiveness Low 1 Number of suppliers Availability of substitutes Switching cost Supplier’s threat of forward integration Industry’s threat of backward integration Contribution to quality Contribution to cost Industry’s importance to supplier Small PC 2 3 4 High 5 Tea stall Large Remark Few PC Tea stall Many High PC Garment Low High PC Wide bodied jetliner Low Low Petrol pumps Garment retailers High High Low PC Oil refining Low end packaging Talcum Powder Cars Low High Low Vinyl record High Table 7: Government actions Attractiveness Low 1 Industry protection Low Tea stall 2 3 4 High 5 Public bus in UK High Remark 5 .

Industry regulation (pollution. (1980) Competitive Strategy. New York: The Free Press. Michael E.) Customs and tariff restrictions abroad High Chemicals Software Low High Garment Software Low Table 8: Overall assessment Attractiveness Low 1 Barriers to entry Rivalry among competitors Barriers to exit Power of buyers Power of suppliers Threat of substitutes Government action Overall attractiveness 2 3 4 High 5 Remark Reference: Porter. 6 . etc.