How can scoring sector attractiveness help you choose the right industry?

Key information:

• One of the most effective ways to analyze a sector's attractiveness is to score it.
• The main idea of the method is to create a list of factors influencing the attractiveness of the sector, and then evaluate them on a set scale.
• The point method of evaluating a sector is an effective tool when our goal is to compare the attractiveness of several industries.
• Using the method to assess sector attractiveness requires a great deal of knowledge regarding the sector of interest.
• The main assumptions underlying the scoring of a sector's attractiveness include: constructing a list of criteria, using weighted ratings, using an appropriate time perspective for the analysis, and evaluating several sectors against the same criteria.
• A point analysis of the sector's attractiveness can be a good addition to the market study conducted earlier, serving as a summary of the study with a clear conclusion.
• The factors selected for analysis should fall into one of the following three areas: market criteria, financial criteria, technical-organizational criteria.
• Other methods that are based on quantitative valuation of sector attractiveness include the Mckinsey method, the French method, and Gierszewska and Romanowska's version.

Details below!

Every entrepreneur, whether considering the direction of his or her first business or, as the CEO of a large corporation, contemplating the goal of diversifying the company, asks the very important question, "Which market sector will be best for us?" Many, especially decision-makers in small companies, plan their next steps based on their intuition. However, such important plans should always be analyzed. One of the most effective ways to analyze a sector's attractiveness is to score it.

What is the scoring of sector attractiveness?

The main idea of the scoring method for assessing sector attractiveness is to create a list of factors that affect the attractiveness of the sector, and then evaluate them on a set scale. The listed criteria affect the industry to a greater or lesser extent, so weighted ratings are used. The choice of criteria and their weights depends on the specifics of the company and what factors in its case play the biggest role.

The point method of assessing a sector is an effective tool when our goal is to compare the attractiveness of several industries. Of course, it can also be used when we want to assess the attractiveness of only one, but without the ability to compare the score to other sectors it loses a lot of added value. Its most important element is the ranking of the analyzed sectors in terms of the weighted score achieved for a given sector.

Assumptions of the attractiveness evaluation method

The application of the method for assessing the attractiveness of a sector requires a great deal of knowledge about the sector of interest, and financial information is also needed. The application of the described method is based on several assumptions:

• construct a list of criteria based on the differences that divide the sectors and their degree of attractiveness,
• weighted ratings should be used due to the importance of individual factors, as some may have a greater or lesser impact on the overall assessment of the sector,
• It is important to pay attention to the time perspective of the analysis performed when evaluating sectors,
• When assessing attractiveness, any number of sectors can be compared with each other. Comparing a larger number of sectors allows for a good assessment when all the sectors studied are analyzed on the basis of the same criteria, which are assigned the same weights.

By evaluating the sectors, we get a ranking list that shows the sectors in a hierarchy from most to least attractive.

How to choose the right criteria for evaluating attractiveness?

The use of the tool, which is the scoring of the sector's attractiveness, should be preceded by a thorough analysis. Expert knowledge of the sector is required to select criteria and give them a rating that reflects market realities. If the entrepreneur does not have such knowledge, a point analysis of the sector's attractiveness will be a good addition to the previously conducted market research and will serve as a summary with a clear conclusion showing which of the sectors considered will be the most profitable for a given company.

Only once we know the specifics of the market and have all the information on the sectors under study can we move on to selecting the appropriate evaluation criteria. The selected factors should fall into one of the following three areas:

- market criteria,
- financial criteria,
- technical and organizational criteria.

There is no single set of criteria, as it depends on the specifics of the company for which this analysis is prepared. They have different needs, so the factors can be chosen freely, depending on what will be important for a particular company to enter a particular market.

An example of a scoring analysis of sector attractiveness:

In this case, the scoring analysis includes 15 universal criteria that can be applied to the vast majority of companies. These factors are rated on a scale of 1 to 5, and each rating is assigned a weight of 1 to 3. The maximum number of points awarded will be 150.

After adding up the points for each of the analyzed industries, a ranking of the attractiveness of the sectors is created, the very substance of the analysis. Those sectors on which a company's entry will be most favorable have the most points, and those that are not so favorable have the least.

A point analysis of sector attractiveness allows a quick assessment of the profitability of entering a given market. Although the analysis is complex and takes many factors into account, the very form of its presentation is transparent and allows one to easily draw conclusions. One look at the final ranking is enough, after which the entrepreneur is already able to compare which sector will be the most attractive for his company.

Advantages and disadvantages of scoring sector attractiveness

Among the main advantages of using the method:

• The ability to make a weighted comparative assessment of several sectors, in terms of different criteria,
• the opportunity to explore the sector in which the company in question operates or the sector it wants to enter.

Among the disadvantages of the described method are:

• The subjective nature of assessing the attractiveness of the sector, which is caused by the dependence of the results on the entity making the assessment,
• The possibility of different interpretations of the evaluation criteria.

Other methods for quantitative assessment of sector attractiveness

Other methods that rely on quantitative valuation of sector attractiveness include:

• The Mckinsey Method 

This is a multidimensional comparative analysis that identifies opportunities for company development and growth in a given sector. It is based on a universal list of criteria, characterizing the sector. barriers to entry into the sector, intensity of competition, as well as opportunities for growth and profitability.

• French method

According to this method, the authors omit to indicate the criteria for each sector. In this method, the value of a sector is indicated by using a table from which the scores for a sector can be read. The authors distinguished 11 criteria. Each criterion is scored on a value scale from 0 to 3.

• Gierszewska and Romanowska's version 

The version assumes analysis of each sector according to 15 specified criteria that characterize the sector's attractiveness. The version is based on a scheme for evaluating the attractiveness of a sector, which distinguishes the criterion, its weight, value and weighted average. The result of the analysis is to have a ranking list that shows the sectors from most to least attractive.