Attractiveness of the sector in the economy - Porter's 5 forces and the McKinsey matrix

Key information:

• Porter's 5 forces analysis allows to assess the attractiveness of the sector taking into account competition, threats from substitutes and new players.
• Barriers to exit and entry play a key role, because the harder it is to enter a market and the easier it is to exit, the more stable the position of the companies operating in it.
• The McKinsey matrix helps a company determine its position in the sector and identifies the optimal strategies for growth or withdrawal from the market.

Details below!

Increasing opportunities for expansion have sparked increased interest among companies to expand their operations. This has increased the popularity of the vertical diversification strategy. It involves a company entering a new market with new products. The result was the development of appropriate tools with which to assess the attractiveness of the sector in which one plans to operate. They allow an in-depth analysis of the industry. Such tools include Porter's 5 forces analysis and the McKinsey matrix.

Porter's 5 forces analysis, and the attractiveness of an economic sector

The model was created by Michael Porter, a world-renowned American strategist. It consists of an analysis of 5 factors that significantly affect the decision to enter a new market and allow you to examine the attractiveness of the sector. Moreover, what is important for a new company is how easily other companies can enter the industry. The model takes into account aspects such as substitutes, competitors, and suppliers.

Threat of new competitors

Analyzing the first factor of Porter's 5 forces, it is important to consider the potential for new businesses to emerge in the sector. In addition, existing barriers to entry must be taken into account. Existing impediments may include the high capital intensity of the industry, the need to meet regulatory requirements or the know-how base required for operation. In contrast, the most favorable combination is high barriers to entry and low barriers to exit. In this case, there is a low probability of the emergence of new market players and it is easy to abandon a company's current operations. It is important to determine where incumbent companies have a competitive advantage over potential new rivals.

The threat of substitutes

This section should assess the likelihood of substitute goods entering the market. You should examine how unique the product is and how easily it can be substituted. In doing so, one must remember to analyze whether substitute goods satisfy customers' needs in the same way as the one produced by the company in question. The analyst must determine which features make a particular company's product different from those of competitors.

Bargaining power of buyers and bargaining power of suppliers

In addition, what matters is how much market power the company will have in relation to buyers and suppliers. Customers, if there are few of them, can significantly influence the company's decisions. Likewise, if there is only one supplier to the company (for example, semi-finished products). He can impose terms favorable to his customer. This can affect the price of the final product and even the profitability of the new-to-market company.

A derivative of the factors analyzed is the assessment of rivalry within the sector. Here it is necessary to examine what position potential competitors occupy and their market share. It is necessary to see what kind of struggle they have and how they stand out from the competition.

Sector attractiveness - using the McKinsey matrix

The McKinsey Matrix was created by the McKinsey consulting firm in cooperation with General Electric. The development of the most widely used version of this model is credited to the Boston Consulting Group. This is a matrix in which the attractiveness of the sector and the competitive position of the company are taken into account. These are the variables on the axes of the coordinate system, in which the nine boxes that make up the matrix are determined. Based on which field a company is in, future actions can be determined for it to maintain or strengthen that position. For example, a strong company in a dynamic sector should seek to establish dominance through steady growth and heavy investment. On the other hand, in the least favorable combination (a small share in a low-growth sector), it should seize the opportunity to gain revenue in the market and exit as quickly as possible. The model also takes into account the company's market share to assess its real opportunities. However, it must be remembered that the embedding of a company in a given field is subjective, and the data there reflects the current situation of the market and should not be the only criterion for predicting the balance of power in the future, as it may change.

The 5 forces analysis and McKinsey matrix are very useful tools in assessing the attractiveness of a sector. As a result, they can be used when considering entry into a new market, and can also provide knowledge about the specifics of the industry. This helps in strategic planning, as their careful analysis allows the company's position in the sector to be determined and leads to recommendations for the company's future activities.

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