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 Porters (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. The 4-firm concentration ratio in the widebodied 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 Low 1 No. 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

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

Substitutes price-value

Better

Vinyl record

Worse

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 Buyers threat of backward integration Industrys 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 Buyers profitability

High

Housing

Low

Low

Public bus service

Luxury cars

High

Table 6: Bargaining power of suppliers

Attractiveness Low 1 Number of suppliers Availability of substitutes Switching cost Suppliers threat of forward integration Industrys threat of backward integration Contribution to quality Contribution to cost Industrys 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

Industry regulation (pollution, etc.) 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, Michael E. (1980) Competitive Strategy, New York: The Free Press.