Interpreting Industry Analyses

Effective industry analysts are products of careful study and interpretation of data Because of globalization, international markets and rivalry must be included in the company’s analyses; in fact, research shows international variables may have more impact on strategic competitiveness than domestic ones, in some cases. Some examples of strategic importance of an industry’s key economic characteristics are given below.

Factor / Characteristic	Strategic Importance
Market size	Small markets don’t tend to attract big/new competitors; large markets often draw the interest of companies looking to acquire competitors with established positions in attractive industries.
Market growth rate	Fast growth breeds new entry; growth slowdowns spawn increased rivalry and a shake out of weak competitors.
Capacity surpluses or shortages	Surpluses push prices and profit margins down; shortages pull them up.
Industry profitability	High-profit industries attract new entrants; depressed conditions encourage exit.
Entry/exit Barriers	High barriers protect positions and profits of existing companies; low barriers make existing companies vulnerable to entry.
Product is a big-ticket item for buyers	More buyers will shop for lowest price
Standardized products	Buyers have more power because it is easier to switch from seller to seller
Rapid technological change	Raises risk factor; investments in technology facilities/ equipment may become obsolete before they wear out.
Capital   requirements	Big requirements make investment decisions critical; timing becomes important; creates a barrier to entry and exit,
Vertical   integration	Raises capital requirements; often creates competitive differences and cost differences among fully versus partially versus non-integrated

Following the study of the five industry forces, the company has the insights required to determine an industry’s attractiveness in terms of the potential to earn adequate or superior returns on its invested capital. In general, the stronger the competitive forces; the lower is the profit potential for an industry’s companies. An unattractive industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong competitive threats from product substitutes, and intense rivalry among competitors, which makes it difficult for companies to achieve strategic competitiveness and earn above average returns.

An attractive industry has the mirror image of these features and offers potential for favorable performance. Some indicators of an attractive industry are given below:

• High returns on capital for players accounting for most of the market;
• A stable or rising average industry return on capital;
• Clear barriers to entry, keeping out many new entrants;
• Capacity at or below the level of demand, and low exit barriers;
• Reasonable or high market growth;
• Little or no threat from substitutes (competing industries);
• Low bargaining power of suppliers relative to the industry;
• Low bargaining power of customers relative to the industry

Characteristics of attractive and unattractive industries are summarized in the Table below

Industry Characteristic   Threat of New Entry	Attractive   High	Unattractive   Low
Bargaining Power of   Suppliers	Low	High
Bargaining Power of Buyers	Low	High
Threat of Substitute   Products	Low	High
Intensity of Competitive   Rivalry	Low	High