18.04.2021

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

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 has been 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

This 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 considers aspects such as substitutes, competitors, and suppliers.

Threat of new competitors

When analyzing the first factor of Porter's 5 forces, one must consider the opportunities 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 in what 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 needs to determine which features make a particular company's product different from those of its 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 are waging 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. It is a matrix in which the attractiveness of the sector and the competitive position of the company are taken into account. These are variables located on the axes of a coordinate system, in which nine fields are determined to form the matrix. Based on which field a company is in, future actions can be determined for the company to maintain or strengthen this 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 entering a new market, and they can also provide insight into 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.

Would you like to carry out 5 forces analysis or McKinsey matrixBut don't know how to go about it? Use the services of a professional consulting company!

Matthew Grzelak

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