Entreprenuership and Small BusinessManagment

Malik Muhammad Zaid

2013-EE-37

Chapter 1

Porter’s Five Forces Model

1.1 Introduction

In “Competitive Advantage”, Porter offered Five-Forces Model of compet-itive analysis. Porter’s Five-Forces Model is illustrated in Figure below.According to Porter, the structure and intensity of industry competition isdetermined by five forces which include customers, suppliers, existing com-petitors, potential competitors and substitutes In the information age, thefive forces are significantly influenced by information technology

Figure 1.1: Porter’s Five-Forces Model

1.2 Rivalry among existing competitors

The IT industry is known for its rapid growth, effectiveness and competition.A main reason why many new entrants are not successful is the intenserivalry between existing players. Large companies in this industry benefit

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Porter’s Five Forces Model

from economies of scale, which is valuable and something they try very hardnot to lose. Products in this industry are well branded and tend to have astrong customer base. Market share is unevenly distributed among existingplayers, who are often in various kinds of legal and advertising battles withone another.

1.3 Threat of substitute products or services

There is not much of a threat from substitutes to the IT industry, mostlybecause there aren’t true substitutes. We live in a digital age, so we rely onIT to run our lives and businesses. An example of a substitute would be ascientific calculator, but to compare the two is a stretch. Nothing can reallyreplace all that computers do for us as a society.

1.4 Bargaining power of customers

In an industry as massive as Information Technology, the term ”buyers”refers to almost everyone in the world. While there are countries that arebehind technologically, a majority of locations in the world have access tocomputers and the internet etc. Given the large number of buyers, it is safe tosay that the customers control the IT industry. There are so many choices fora buyer (many firms in this industry) and there are minimal switching costs,so customers aren’t typically ”locked in” to one firm. Also, because a lot ofIT sales come from companies that make large purchases, those companiesare powerful and important to the IT firms (who often provide incentivesto these businesses, in order to convince them to utilize their products overcompetitors). Customers are sensitive to price, but IT products and servicesare necessary to the success of businesses, so they are willing to spend a lot ofmoney to get a good product. There are typically many interactions betweenbuyers and IT companies because of the need for training to use products,constantly upgraded technology and an abundance of advertising.

1.5 Bargaining Power of Suppliers

Although companies like Intel and AMD are a part of the IT industry, forthe purpose of this project I will be classifying those companies as suppliersto the IT industry’s firms. The inputs in this industry are pretty standard,with differences being speed, memory etc. Though the inputs are standard,new companies find it difficult (not impossible) to enter this industry as a

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Porter’s Five Forces Model

supplier because of the existing relationships between current suppliers andIT firms, the ever changing and improving technologies of the world andthe intense rivalry between existing players. IT firms are very important tosuppliers because they are their primary customers, but I believe suppliersare even more important to buyers(IT firms). Suppliers are not ”locked” intodeals with specific firms (contracts exempt), but most of the relationshipsbetween the firms and suppliers in this industry are well established, andthese suppliers would most likely not want to end their relationships withfirms in the first place.

1.6 The threats of new entrants

The IT industry is relatively attractive to newcomers because of its rapidgrowth and appealing customer base. At the same time, the industry isunattractive to newcomers because of the cost advantage large-scale incum-bents possess, the significant amount of capital a new firm would need, andthe major established brands already in the industry. Any newcomer in thisindustry can expect a strong retaliation from existing players, which is a ma-jor reason this industry is not too attractive. The best way for a new entrantin this field to be successful would be if they had a brand new idea for aproduct or service; the lack of differentiation in the industry is one thing anewcomer could exploit. Overall, the IT industry isn’t overly attractive, butit is routine and profitable enough that a lot of people try and enter it. Manynew firms try to enter this industry, but they rarely give established namesa real run for their money

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