Report on

Porters Five Forces Model

Applied in Computer

Industry

By

Hassan al banna - 14Rakesh ranjan jha – 12

Tariq omer – 08

Pgprm 2008-10

CONTENTS

INTRODUCTION

FIVE COMETITIVE FORCES

FIVE FORCE ANALYSIS

COMPETITIVE LANDSCAPE

COMPUTER SALE

MARKET TREND

PORTERS FIVE FORCE APPLIED TO COMPUTER INDUSTRY

CONCLUSION

BIBLIOGRAPHY

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INTRODUCTION

The model of the Five Competitive Forces was developed by Michael E. Porter in his

book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in

1980.

Since that time it has become an important tool for analyzing an organizations industry

structure in strategic processes.

Porter’s model is based on the insight that a corporate strategy should meet the

opportunities and threats in the organizations external environment. Especially,

competitive strategy should base on and understanding of industry structures and the way

they change.

Porter has identified five competitive forces that shape every industry and every market.

These forces determine the intensity of competition and hence the profitability and

attractiveness of an industry. The objective of corporate strategy should be to modify

these competitive forces in a way that improves the position of the organization. Porter’s

model supports analysis of the driving forces in an industry. Based on the information

derived from the Five Forces Analysis, management can decide how to influence or to

exploit particular characteristics of their industry.

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THE FIVE COMPETITIVE FORCES

Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order to provide

goods or services. Supplier bargaining power is likely to be high when:

The market is dominated by a few large suppliers rather than a fragmented source

of supply,

There are no substitutes for the particular input,

The suppliers’ customers are fragmented, so their bargaining power is low,

The switching costs from one supplier to another are high,

There is the possibility of the supplier integrating forwards in order to obtain

higher prices and margins. This threat is especially high when

The buying industry has a higher profitability than the supplying industry,

Forward integration provides economies of scale for the supplier,

The buying industry hinders the supplying industry in their development (e.g.

reluctance to accept new releases of products),

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The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins from their

suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the

organization.

Bargaining Power of CustomersSimilarly, the bargaining power of customers determines how much customers can impose

pressure on margins and volumes. Customers bargaining power is likely to be high when

They buy large volumes, there is a concentration of buyers,

The supplying industry comprises a large number of small operators

The supplying industry operates with high fixed costs,

The product is undifferentiated and can be replaces by substitutes,

Switching to an alternative product is relatively simple and is not related to high costs,

Customers have low margins and are price sensitive,

Customers could produce the product themselves,

The product is not of strategical importance for the customer,

The customer knows about the production costs of the product

There is the possibility for the customer integrating backwards.

Threat of New EntrantsThe competition in an industry will be the higher; the easier it is for other companies to enter this

industry. In such a situation, new entrants could change major determinants of the market

environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent

pressure for reaction and adjustment for existing players in this industry.

The threat of new entries will depend on the extent to which there are barriers to entry.

These are typically

Economies of scale (minimum size requirements for profitable operations),

High initial investments and fixed costs,

Cost advantages of existing players due to experience curve effects of operation with fully

depreciated assets,

Brand loyalty of customers

Protected intellectual property like patents, licenses etc,

Scarcity of important resources, e.g. qualified expert staff

Access to raw materials is controlled by existing players,

Distribution channels are controlled by existing players,

Existing players have close customer relations, e.g. from long-term service contracts,

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High switching costs for customers

Legislation and government action.

Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices of better

performance parameters for the same purpose. They could potentially attract a significant

proportion of market volume and hence reduce the potential sales volume for existing

players. This category also relates to complementary products.

Similarly to the threat of new entrants, the treat of substitutes is determined by factors

like

Brand loyalty of customers,

Close customer relationships,

Switching costs for customers,

The relative price for performance of substitutes,

Current trends.

Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players (companies) in

an industry. High competitive pressure results in pressure on prices, margins, and hence,

on profitability for every single company in the industry.

Competition between existing players is likely to be high when

There are many players of about the same size,

Players have similar strategies

There is not much differentiation between players and their products, hence, there

is much price competition

Low market growth rates (growth of a particular company is possible only at the

expense of a competitor),

Barriers for exit are high (e.g. expensive and highly specialized equipment).

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Use of the Information form Five Forces AnalysisFive Forces Analysis can provide valuable information for three aspects of corporate

planning:

Statical Analysis:

The Five Forces Analysis allows determining the attractiveness of an industry. It provides

insights on profitability. Thus, it supports decisions about entry to or exit from and

industry or a market segment. Moreover, the model can be used to compare the impact of

competitive forces on the own organization with their impact on competitors.

Competitors may have different options to react to changes in competitive forces from

their different resources and competences. This may influence the structure of the whole

industry.

Dynamical Analysis:

In combination with a PEST-Analysis, which reveals drivers for change in an industry,

Five Forces Analysis can reveal insights about the potential future attractiveness of the

industry.

Expected political, economical, socio demographical and technological changes can

influence the five competitive forces and thus have impact on industry structures.

Useful tools to determine potential changes of competitive forces are scenarios.

Analysis of Options:With the knowledge about intensity and power of competitive forces, organizations can

develop options to influence them in a way that improves their own competitive position.

The result could be a new strategic direction, e.g. a new positioning, differentiation for

competitive products of strategic partnerships Thus, Porters model of Five Competitive

Forces allows a systematic and structured analysis of market structure and competitive

situation. The model can be applied to particular companies, market segments, industries

or regions. Therefore, it is necessary to determine the scope of the market to be analyzed

in a first step. Following, all relevant forces for this market are identified and analyzed.

Hence, it is not necessary to analyze all elements of all competitive forces with the same

depth.

The Five Forces Model is based on microeconomics. It takes into account supply and

demand, complementary products and substitutes, the relationship between volume of

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production and cost of production, and market structures like monopoly, oligopoly or

perfect competition.

Influencing the Power of Five ForcesAfter the analysis of current and potential future state of the five competitive forces,

managers can search for options to influence these forces in their organization’s interest.

Although industry-specific business models will limit options, the own strategy can

change the impact of competitive forces on the organization. The objective is to reduce

the power of competitive forces.

The following figure provides some examples. They are of general nature. Hence, they

have to be adjusted to each organization’s specific situation. The options of an

organization are determined not only by the external market environment, but also by its

own internal resources, competences and objectives.

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THE COMPUTER INDUSTRY2009 is set to be a difficult year for India's potentially vast IT market, as the country is

buffeted by strong economic headwinds. The report has downwardly revised its five-year

IT spending projections. The total size of the IT market is now projected to increase from

US$14.5bn in 2009 to US$24.4bn by 2013. IT spending growth slowed significantly in

Q408 and was estimated to be down year-on-year (y-o-y) in Q109, but a recovery is

expected to begin in the second half of the year.

Sales of both desktops and notebooks recovered somewhat in Q109 to record sequential

quarterly growth, but sales were still down y-o-y. Multinational and domestic companies

were deferring spending, and the malaise spread to the consumer segment, where layoffs

and a negative wealth effect from lower asset values affected spending. The report

expects the Indian IT market to improve by the last quarter of 2009, but margins for sales

of IT products and services will remain under pressure.

The long-term potential of India's IT market is plain: less than 3% of people in India own

a computer (about one-fifth of the level in China), meaning particular potential in the

lower end product range. However, realisation of this long-term growth potential depends

on fundamental drivers such as raising India's low computer penetration, rising incomes,

falling computer prices and the government's ambitions to connect the vast rural areas to

the outside world.

Competitive Landscape

In early 2009 several brand PC vendors came under pressure as a result of the negative

market trends.

Dell and Lenovo were reportedly among vendors who saw market share slippage in Q1.

Much of the growth is now being fuelled by notebooks, with notebook shipments now

level or slightly surpassing desktops. The popularity of netbooks has the potential to

stimulate further evolution in the competitive landscape in 2009.

PC market leader HP announced plans that deepened its commitment to the Indian

market, with an aggressive concentration on the retail segment, despite the economic

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slowdown. HP said that it would expand its retail footprint across 650 cities this year,

while growing its retail partner network to over 10,000 by the end of 2009. HP also said

that it was moving towards a different method of segmentation of the Indian PC market,

based more on lifestyle and 'psychological' categories.

Despite the economic slowdown, IT services vendors continued to find opportunities in

key IT spending verticals, particularly telecoms. In May 2009, Wipro signed a INR2,200

crore nine-year contract with Unitech Wireless. Wipro will integrate the company's

enterprise resource planning (ERP) system and host all its data centres. This win followed

an INR 3,000 crore contract that Wipro signed with Aircel earlier this year.

Computer Sales

According to forecasts, computer sales (including notebooks) in India's hardware market

will be worth around US$6.0bn in 2009, up from an estimated US$5.8bn in 2008. The

report has downwardly revised its computer hardware sales projections for 2009, to

reflect negative business and consumer sentiment.

Growth slowed significantly , with negative sequential quarterly growth in Q408. In

2009, computer hardware sales growth is expected to ease further, but to remain in

positive territory, before ticking up again in 2010.

The economic slowdown has had a particularly hard impact on business spending, with

multinational corporations and local firms deferring investments. However, the report

predicts that the CAGR for the hardware sector as a whole will be 14% between 2009 and

2013, with unit sales expected to resume strong growth. Only nine out of 1,000 people in

India own a computer, one-fifth of the China level. The government's ultimate goal is for

1bn internet-connected computers in India - equivalent to the total estimated number of

PCs in the world today.

Market TrendIn a subdued India PC market, Hewlett-Packard (HP) held the largest share, HCL

Infosystems grew and Dell saw a decline in its share during 1Q 2009 (January-March

2009), according to technology research firm IDC India's latest study.

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HP maintained its lead and gained share in PCs (desktops and notebooks) to capture 18.2

per cent of the India PC market in terms of unit shipments. HCL Infosystems with a

market share of 9.8 per cent of overall PC Shipments regained the second spot. Dell,

which jumped to second position for the first time in the Oct-Dec 2008 quarter, slipped to

third spot in 1Q 2009.

While Acer's market share dipped marginally (7.7 per cent in 4Q 2008 to 7.3 per cent in

1Q 2009), Lenovo's share showed a more pronounced drop of 1.9 points (6.6 per cent in

4Q 2008 to 4.7 per cent in 1Q 2009), says the IDC India Study.

HP has been numero uno in India PC market consistently every quarter over the last four

years (2005, 2006, 2007 and 2008).At the global level as well, HP dethroned Dell to

claim the No.1 spot in the US PC market, while Dell faced a tough quarter across the

board.

India PC market witnessed a seven percent quarter-on-quarter (QoQ) growth in

shipments in 1Q 2009 (first quarter calendar year 2009) over 4Q 2008 (fourth quarter of

calendar 2008).

A total of 16, 79,000 units of clients PCs (desktops and notebooks) were shipped in the

January-March quarter of 2009. Desktop PC shipments of 12, 13,000 units recorded a

sequential growth of 9 per cent QoQ while notebook PC shipments of 4,66,000 units

recorded a growth* of 3 percent QoQ.

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Table 1: India PC Shipments: Top 5 Vendor Shares (% of units), 1Q 2009 vs. 4Q 2008*

4Q 2008 PC Shipments (Desktop PCs + Notebook PCs)

1Q 2009 PC Shipments (Desktop PCs + Notebook PCs)

Vendor Market Share Vendor Market Share

Hewlett-Packard 15.6% Hewlett-Packard 18.2%Dell 11.0% HCL Infosystems 9.8%HCL Infosystems 9.6% Dell 9.7%Acer 7.7% Acer 7.3%Lenovo 6.6% Lenovo 4.7%

*According to IDC’s Asia/Pacific Quarterly PC Tracker 2009, 1Q 2009 quarter, May 2009 release

Table 2: India PC Shipments and Growth by Form Factor: 1Q 2009 over 1Q 2008*

Form Factor 1Q 2008 4Q 2008 1Q 2009 Growth 1Q 2009 over 1Q 2008

Growth 1Q 2009 over 4Q 2008

Desktop PCs 14,81,000 11,09,000 12,13,000 -18% 9%

Notebook PCs 5,90,000 4,54,000 4,66,000 -21% 3%

Total Client PC 20,72,000 15,63,000 16,79,000 -19% 7%*According to IDC’s Asia/Pacific Quarterly PC Tracker 2009, 1Q 2009, May 2009 release

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PORTER’S FIVE FORCES MODEL

Porter’s Five Forces Applied to Computer Industry

Threat of New Entrants Barriers to Entry

1) Product Differentiation – In the PC market there is hardly any product

differentiation. Computers are coming up with the same configuration but the

only difference which remains is the price.

2) Switching Cost – In order to switch from one brand to another the switching

cost is high. If we are using Lenovo portable and Dell enters the market with

better features then to switch from Lenovo to Dell will involve high cost.

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3) Access to Distribution Channels – Every major PC company has their own

distribution channel. It will be difficult for a new entrant to come and create a

new distribution channel.

4) Capital Requirements – In case of PC industry the capital requirement is huge.

5) Government Policies - Service tax was cut from 12% to 10% and excise duty

from 10% to 8%.

Bargaining Power of SuppliersSuppliers exert power in the industry by threatening to increase prices or reduce

quality. Power supplier can squeeze industry profitability.

In the computer industry –

1) Supplier is dominated by few firms

2) Suppliers’ product is an important input to the buyers product

3) Suppliers’ product has few substitutes

Intel’s microprocessor chips are used in approximately 80% of personal

computers.

Microsoft operating systems are used in 90% of computers, giving it substantial

bargaining power.

Given that Microsoft and Intel control the majority of the PC supplier market of

major component parts, the business world has named the two “Wintel.”

Bargaining Power of BuyersThe strength of the PC buyer has basically evolved from the personal computer

becoming a commodity-like item.

Backward integration is also a factor in the strengthening of the PC buyers

bargaining Power because more and more people are building their own computer

systems.

INDIVIDUAL

BUYER

ORGANIZATIONAL

BUYER

MODERATE HIGH

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Threat of New Substitutes These are products with similar functions. In case of computer industry the

substitutes will be:

1) PDA - A personal digital assistant (PDA) is a mobile device, also known as a

palmtop computer. Newer PDAs commonly have color screens and audio

capabilities, enabling them to be used as mobile phones (smart phones), web

browsers, or portable media players. Many PDAs can access the Internet, intranets

or extranets via Wi-Fi, or Wireless Wide Area Networks (WWANs). Many PDAs

employ touch screen technology.

2) Smart Phone - smartphone is a mobile phone offering advanced capabilities,

often with PC-like functionality (PC-mobile handset convergence). There is no

industry standard definition of a smartphone. For some, a smartphone is a phone

that runs complete operating system software providing a standardized interface

and platform for application developers. For others, a smartphone is simply a

phone with advanced features like e-mail, Internet and e-book reader capabilities,

and/or a built-in full keyboard or external USB keyboard and VGA connector. In

other words, it is a miniature computer that has phone capability.

3) Palm Tops - A Handheld PC, or H/PC for short, is a term for a computer built

around a form factor which is smaller than any standard laptop computer. It is

sometimes referred to as a Palmtop. The first handheld device compatible with

desktop IBM personal computers of the time was the Atari Portfolio of 1989.

Another early model was the Pocket PC of 1989 and the Hewlett Packard HP

95LX of 1991. Other MS DOS compatible hand-held computers also existed.

Rivalry among existing customers Intense rivalry often plays out in the following ways:

1) Jockeying for strategic position

2) Using price competition

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3) Staging advertising battles

4) Increasing consumer warranties or service

5) Making new product introductions

Cutthroat competition is likely to occur when:

1) Market share – Every big company or new entrant is aiming for the market

share. A fight is going on between the major players and everyone wants

to be the market leader.

Table 1: India PC Shipments: Top 5 Vendor Shares (% of units), 1Q 2009 vs. 4Q 2008*

4Q 2008 PC Shipments (Desktop PCs + Notebook PCs)

1Q 2009 PC Shipments (Desktop PCs + Notebook PCs)

Vendor Market Share Vendor Market Share

Hewlett-Packard 15.6% Hewlett-Packard 18.2%Dell 11.0% HCL Infosystems 9.8%HCL Infosystems 9.6% Dell 9.7%Acer 7.7% Acer 7.3%Lenovo 6.6% Lenovo 4.7%

*According to IDC’s Asia/Pacific Quarterly PC Tracker 2009, 1Q 2009 quarter, May 2009 release

2) Lack of Differentiation – There is hardly any lack of differentiation in the

product. Everyone in the PC market is fighting for price.

3) Price Competition – Since there is lack of differentiation in the product

major players are fighting on price.

4) Diverse Competitors – New entrants like Nokia and Croma are there. And

in existing players we have Aamaar PC, Samsung, LG.

5) Staging Advertising Battle – There is an advertising battle also going on in

the industry. For example Acer has Hrithik, Compaq has Shahrukh and

Lenovo has Saif Ali Khan.

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CONCLUSION

Porter’s model of Five Competitive Forces has been subject of much critique. Its main

weakness results from the historical context in which it was developed. In the early

eighties, cyclical growth characterized the global economy. Thus, primary corporate

objectives consisted of profitability and survival. A major prerequisite for achieving these

objectives has been optimization of strategy in relation to the external environment. At

that time, development in most industries has been fairly stable and predictable,

compared with today’s dynamics. In general, the meaningfulness of this model is reduced

by the following factors:

In the economic sense, the model assumes a classic perfect market. The more an

industry is regulated, the less meaningful insights the model can deliver.

The model is best applicable for analysis of simple market structures. A

comprehensive description and analysis of all five forces gets very difficult in

complex industries with multiple interrelations, product groups, byproducts and

segments. A too narrow focus on particular segments of such industries, however,

bears the risk of missing important elements.

The model assumes relatively static market structures. This is hardly the case in

today’s dynamic markets. Technological breakthroughs and dynamic market

entrants from start-ups or other industries may completely change business

models, entry barriers and relationships along the supply chain within short times.

The model is based on the idea of competition. It assumes that companies try to

achieve competitive advantages over other players in the markets as well as over

suppliers or customers. With this focus, it dose not really take into consideration

strategies like strategic alliances, electronic linking of information systems of all

companies along a value chain, virtual enterprise-networks or others.

Overall, Porters Five Forces Model has some major limitations in today’s market

environment. It is not able to take into account new business models and the dynamics of

markets. The value of Porters model is more that it enables managers to think about the

current situation of their industry in a structured, easy-to-understand way – as a starting

point for further analysis.

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BIBLIOGRAPHY

www.wikipedia.comhttp://economictimes.indiatimes.com/Infotech/Hardware/HP-holds-largest-share-in-India-PC-market-Study/articleshow/4649210.cmshttp://www.idcindia.com/Press/10June2009.htmlhttp://www.companiesandmarkets.com/print-friendly-india-information-technology-report-q3-2009-155756.aspx

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