You can use an industry and profitability analysis in several ways to guide your strategic decisions.

You can benefit from industry analysis by:

  1. Understanding the competitive forces in your industry.
  2. Assessing the attractiveness of, and growth opportunities within, a
    new industry.
  3. Developing effective strategies to raise your profitability, power,
    and competitive position in an industry.

There are many features of an industry that determine the intensity of competition and the level of profitability. A widely used framework for analyzing these factors is the one developed by Michael Porter of the Harvard Business School. Porter's five Forces model views the profitability of an industry as determined by five sources of competitive pressure.

These five forces of competition include three sources of "horizontal" competition: the bargaining power of suppliers and buyers, and competition from established rivalry; and two "vertical" competition: competition from substitutes and competition from new entrants. The strength of each of these competitive forces is determined by a number of key structural factors presented in the table.

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Use the following worksheet to gain valuable insights that can help you better understand and enhance performance, competitive position, and profitability.

1 - Highly Attractive  2 - Mildly Attractive  3 - Neutral
Economies of scale Small Large
Product Differentiation Little Big
Brand Identification Low High
Switching cost Low High
Access to distribution Channels Ample Restricted
Capital investment requirements Low High
Access to latest technoloy Ample Restricted
Access to raw materials Ample Restricted
Government regulation/protection Nonexistant High
Experience effect Unimportant Very
Asset Specialization High Low
One-time cost of exit High Low
Strategic interrelationship High Low
Emotional barriers High Low
Government and social restrictions High Low
Number of Equally balanced
Large Small
Industry growth rate Slow Fast
Fixed and storage costs High Low
Product Features Commodity Speciality
Capacity Increases Little Big
Diversity of Competitors High Low
Strategic stakes High Low
Number of important buyers Few Many
Availability of substitutes for industry products Many Few
Buyer switching costs Low High
Buyers' threat of backward integration High Low
Industry threat of forward integration Low High
Contribution to quality or service of buyers' products Large Small
Total buyers cost contributed by the industry Large fraction Small fraction
Number of important suppliers Few Many
Availability of substitutes for suppliers' products  Low High
Differentiation or switching cost of suppliers' products High Low
Suppliers' threat of forward integration High Low
Industry threat of backward integration Low High
Suppliers' contribution to quality or service of the industry products High Small
Total industry cost contributed by suppliers Large fraction Small fraction
Importance of the industry to suppliers' profit Small Large
Availability of close substitutes Large Small
User's switching costs Low High
Substitute producer's aggressiveness High Low
Substitute Price/value High Low

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