Industry Analysis

Industries Attractiveness

Industries vary in their attractiveness, or long-term profit potential, based not only on their overall size and growth rate but also on the extent of rivalry exhibited by competitors. As a result, the first step of an industry analysis is to evaluate total market size and growth rates and to assess competitive rivalry. Market size is typically measured by determining the total revenues generated by relevant industry competitors. Depending on the organization, the market could be defined regionally, nationally, or even globally. Most health care organizations compete mainly with other local entities and hence would seek information on market[Page 289] size within the region. In contrast, some prestigious medical institutions offer highly specialized services drawing patients from all over the world. The market for heart transplants, for example, is defined globally.

Market growth rate is another key indicator of industry attractiveness. Most organizations seek at least moderate growth in revenues, but this is difficult to come by in a stagnant or declining industry. Moreover, knowing whether industry revenues are growing helps administrators to make sense of their own revenue gains. Revenue growth of 3% might appear an adequate outcome for an organization, but perhaps not if the industry has grown by 6%. A 13% decline in sales could be acceptable (at least in the short run) if industry revenues have declined by 18%.

Excessive competition can make matters worse by reducing the earnings associated with hard-earned revenues. In his book Competitive Strategy (1980), Michael Porter showed that the intensity of competition within an industry is a function of five basic structural forces. These include the threat of new entrants, buying power of customers, buying power of suppliers, threat of substitutes, and rivalry among existing firms. The collective strength of these forces determines the overall profit potential, and therefore the attractiveness, of an industry.

By carefully analyzing the strength of these forces within an industry, administrators can determine how to position their organizations to defend against these forces or how to influence these forces in their favor. In addition, they can decide whether further investment in an industry is warranted or whether another market might yield more substantial returns in the long run.

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