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 competitors |Large |Grocery store | | | | | | | | | | | | |Low | | |...