MGMT 3519: Guidelines for Industry Analysis

Level 1 Analysis
1. Assess the strength, or degree of threat, of each factor underlying each force. For
instance, is the threat high, moderate, or low? Use a scale of 1 - 5 where 1 = weak
factor or a factor that decreases the threat favorable impact, 2 = moderately
favorable, 3 = neutral, 4 = moderately unfavorable, and 5 = strong factor or a factor
that increases the threat. Justifying your conclusion is critical. A factor that poses a
low threat is interpreted as having a favorable impact on the force. A factor that
poses a high threat is interpreted as having an unfavorable impact on the force.
Examples:
In the commercial jet aircraft industry, the enormous fixed costs of product development
(it costs Boeing $5 billion to develop its wide-bodied 777) reduce the threat of entry
(increase the barriers to entry) and thereby have a favorable impact on the industrys
attractiveness.
2. Use descriptive information where appropriate. For instance, when evaluating buyer
power, state the main buyer groups; when evaluating supplier power, identify the
main categories of suppliers.
Example for the wireless handset industry:
Wireless handsets are composed of a number of disparate components provided by 3
tiers of suppliers. The first tier of suppliers provides commodity inputs such as resistors,
capacitors, speakers/microphones and batteries. The second tier provides less
standardized components such as RF components and subsystems. The third tier
supplies custom or semi-customer ASICs such as digital signal processors (DSPs),
baseband processors, and software. Quality labor is also an important input to the
industry, particularly high skilled labor tasked with engineering and R & D
responsibilities.
Level 2 Analysis
1. Provide an overall assessment of each force based on the level 1 analysis. Use the
same scale used in the Level 1 analysis where 1 = weak, low, favorable and 5 =
high, strong, unfavorable. A force that poses a low threat is interpreted as having a
favorable impact on an industrys profit potential and on industry attractiveness. A
force that poses a high threat is interpreted as having an unfavorable impact on
industry attractiveness.
Some factors will increase the threat or have an unfavorable impact on the
attractiveness of the force; other factors will decrease the threat and have a
favorable impact on the attractiveness of the force; some factors may have a neutral
effect on the force. The level 2 analysis requires that you reconcile these various

effects to define whether the force has a favorable or unfavorable effect on industry
attractiveness.
Examples for the wireless handset industry:
Level 2 Analysis for Supplier Power: Even though the number/concentration of
supplies, (low) availability of substitutes and presence of switching costs have
moderately unfavorable impacts on attractiveness, the impact of these elements is
offset by the importance of the industry to suppliers and the minimal forward
integration threat from suppliers. Our conclusion is that Supplier Power as a
competitive force has a moderately favorable impact on industry attractiveness.
Level 2 Analysis for Threat of Substitutes: Low relative price performance, high
switching costs, and the low propensity to substitute all reduce the threat of
substitutes thus having a favorable impact on attractiveness. Our conclusion is that
Substitutes as a competitive force has a favorable impact on the industrys
attractiveness.
Level 3 Analysis
1. Collectively, the 5 forces define the overall attractiveness and profit potential for an
industry. Using your level 2 analysis, assess the attractiveness and profit potential
of the industry as a whole. Rank or weight each force based on its effect on industry
attractiveness. Justify your conclusions.
Example for the wireless handset industry:
Table II.B.3. Summary of Level 3 Analysis
Competitive Force
Effect on Industry
Rivalry
Moderately UnFavorable

Score
4

Ranking
1st

Buyer Power

Unfavorable

2nd

Barriers to Entry for

Potential Entrants
Threat of Substitutes

Favorable

3rd

Favorable

4th

Supplier Power
Overall

Moderately Favorable
Unattractive

5th

Summary: The level 3 analysis indicates that rivalry is moderately unfavorable, buyer
power is unfavorable, barriers to entry for potential entrants and the threat of substitutes
are favorable, and supplier power is moderately favorable. Rivalry is considered the
most crucial force affecting industry profitability and buyer power as the second most
critical force. As discussed in the level 2 analysis, the potential for a persistent decline in
the industry growth rate, substantial fixed costs of entry, increasing strategic stakes and

competitor diversity along with uncertainty regarding capacity requirements gives rise to
intense rivalry conditions. The increasing strength of buyers further fuels competition as
firms battle to retain and gain market share. Together, moderately unfavorable rivalry
conditions and unfavorable buyer power conditions operate to reduce the average
industry profitability and more than offset the favorable aspects of the other 3
competitive forces.