Evaluation of sector's attractiveness

By evaluation of the attractiveness of the sector, we can determine the structural characteristics of the sector, the forces causing the changes, it also provides information about competitors. This method makes possible to assess the profitability of entering the sector (or exit from the sector) and facilitates the development of an appropriate strategy. Evaluation of the attractiveness of the sector is carried out on the basis of comparisons with other industries.

Evaluation criteria

The attractiveness of the sector is mostly determined by using the following evaluation criteria:

• market criteria (e.g. market, competition, stability),
• financial criteria (e.g. profitability, return on investment, capital needs, the level of prices),
• organizational and technical criteria (e.g. technology, the quality level of the products, the delivery system, the possibility of cooperation).

Weighing scale of evaluation criteria can be specified in the range of 1 to 10 points. Levels of importance are as follows:

• 10 points maximum
• 7 points - high
• 5 points - average (in a good way)
• 4 points - average (sufficient)
• 1 point - slight degree of suitability

Example of application

Table 1. Example scoring of the attractiveness of the sector

1. Technological requirements |

Evaluation criteria	The range of validity	Importance and severity of present situation
1. Competition power	1-10	8
2. Market saturation level	1-10	7
3. Market dynamics	1-10	10
4. industry Risk	1-10	8
5. Freedom of economic activity	1-10	10
6. Macroeconomic Risk	1-7	4
1-7	5
8. Capital needs	1-7	6
9. Operational risk	1-5	3
10. Opportunities of cooperation	1-5	5
Total	1-81	66

At the end we have to sum the weighted rating scale and determine category of sector:

• high attractiveness of the sector = > (81-73)
• satisfactory attractiveness of the sector = > (70-60)
• satisfactory attractiveness of the sector = > (59-49)
• weak attractiveness of the sector = > (48-38)
• critical attractiveness of the sector = > (37-27)

Advantages of Evaluation of sector's attractiveness

• Evaluation of the attractiveness of the sector provides an opportunity to identify the competitive advantages and disadvantages of the sector.
• It allows for a better understanding of the market structure, the competitive forces and their impact on the sector.
• It helps to determine the price-volume dynamic and the customer behaviour of the sector.
• It allows for the development of an appropriate strategy that can be tailored to the sector.
• It can provide insight into the potential for innovation and the possibilities for product differentiation.
• It can provide an indication of the level of customer loyalty and the customer base.
• It helps to identify the strengths and weaknesses of the sector, which can be used to create a competitive advantage.
• It can provide an indication of market trends, helping to determine the direction of the sector in the future.

Limitations of Evaluation of sector's attractiveness

• Evaluating the attractiveness of a sector can be a difficult task because it is based on qualitative and subjective criteria.
• The attractiveness of a sector can be difficult to quantify and compare to other sectors, as the criteria for evaluating it can vary depending on the individual investor's goals and preferences.
• The analysis of the sector's attractiveness is based on the assumption that the sector will remain stable; this assumption can be difficult to make in an ever-changing market.
• The evaluation of the sector's attractiveness also requires an understanding of the competitive forces at play in the sector, which can be difficult to determine.
• Unforeseen risks, such as political or economic changes, can also have a significant impact on the sector's attractiveness, making the evaluation process even more challenging.

Other approaches related to Evaluation of sector's attractiveness

• The five forces model - The five forces model is a framework developed by Michael Porter used to analyze the attractiveness of an industry by looking at the competitive forces in the industry. It helps to identify the sources of competitive advantage and the potential for profitability in the sector.
• Market segmentation - Market segmentation is the process of dividing a market into distinct groups of customers with different needs and preferences. This approach helps to understand the sector’s customer base, their needs and preferences, and identify potential opportunities for growth.
• Porter's generic strategies - Porter's generic strategies are a framework developed by Michael Porter to help firms make strategic choices within the industry. This approach helps firms to identify the key elements of their respective strategies and assess the potential for long-term success in the sector.
• Industry life cycle - The industry life cycle is a framework used to analyze the evolution of an industry over time. This approach helps to identify the current stage of the sector and the potential for growth or decline in the future.

In summary, other approaches related to evaluation of sector's attractiveness include the five forces model, market segmentation, Porter's generic strategies, and the industry life cycle. These approaches can provide firms with insights into the competitive environment, customer base, and potential opportunities for growth in the sector.

Evaluation of sector's attractiveness — recommended articles

Hofer matrix — SPACE method — Market attractiveness — ADL matrix — McKinsey matrix — Company situation analysis — Map of strategic groups — Key success factors — Strategic analysis methods

References

• Dawid, H., & Reimann, M. (2005). Evaluating market attractiveness: individual incentives versus industry profitability. Computational Economics, 24(4), 321-355.