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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
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

No. of Large Grocery × Wide bodied jetliner Small


competitors store

Industry growth Slow Vinyl record × Internet browser Fast

Fixed cost High Steel × Real estate agency Low

Differentiation Low Sugar × Beer High

Switching cost Low Diskette × Software High

Openness of Secret Used car × Stocks Open


terms of sales

Excess capacity Large Residential × Office space in Small


property in South Mumbai
Bangalore

Strategic stakes High Internet × Part-time coaching Low


browser

Table 2: Barriers to exit

Attractiveness Remark

Low High

1 2 3 4 5

Asset High Steel Automotive Small


specialization gears

Cost of exit High Steel Tea stall Small

Government High Public bus Grocery Small


restrictions service in UK store

Table 3: Barriers to entry

Attractiveness Remark

Low High

2
1 2 3 4 5

Economies of scale Small Tea stall Oil refinery Large

Product Low Sugar Beer High


differentiation

Brand identity Low Sugar Cigarette High

Switching cost Low Diskette Software High

Access to channels Easy Newspaper Petrol Limited


of distribution

Capital requirement Small Tea stall Oil refinery Large

Access to Easy Generic AIDS Restricted


technology drugs medicine

Access to raw Easy Distilled Ivory Restricted


material water

Government None Tea stall Public bus Substantial


protection in UK

Table 4: Threat from substitutes

Attractiveness Remark

Low High

1 2 3 4 5

Availability of High Fountain pen AIDS Low


close substitutes medicine

Switching cost Low Diskette Customized High


Software

Substitute’s Better Vinyl record Suburban Worse


price-value trains in
Mumbai

Profitability of High Vinyl record Trans- Low


the producers of Atlantic flight
substitutes

Table 5: Bargaining power of buyers

Attractiveness Remark

Low High

3
1 2 3 4 5

Number of Small Air bags for Toothpaste Large


buyers cars

Availability of Many Fountain pen AIDS Few


substitutes medicine

Switching cost Low Diskette Software High

Buyer’s threat of High Air bags for Cars Low


backward cars
integration

Industry’s threat Low Air bags for Oil refinery High


of forward cars
integration

Contribution to Low Low end Semi- High


quality packaging conductor
chips

Contribution to High Housing Paper clips Low


cost

Buyer’s Low Public bus Luxury High


profitability service cars

Table 6: Bargaining power of suppliers

Attractiveness Remark

Low High

1 2 3 4 5

Number of Small PC Tea stall Large


suppliers

Availability of Few PC Tea stall Many


substitutes

Switching cost High PC Garment Low

Supplier’s High PC Wide Low


threat of bodied
forward jetliner
integration

Industry’s Low Petrol pumps Garment High


threat of retailers
backward
integration

4
Contribution High PC Low end Low
to quality packaging
Low Talcum powder High
Contribution Oil refining
to cost

Industry’s Low Vinyl record Cars High


importance to
supplier

Table 7: Government actions

Attractiveness Remark

Low High

1 2 3 4 5

Industry protection Low Tea stall Public bus High


in UK

Industry regulation High Chemicals Software Low


(pollution, etc.)

Customs and tariff High Garment Software Low


restrictions abroad

Table 8: Overall assessment

Attractiveness Remark

Low High

1 2 3 4 5

Barriers to entry

Rivalry among competitors

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.