Porter's Five Forces Framework

 Introduction

With fast development in technological advances and e commerce, the personal computer industry is one of the most important industries in today's world. To analyses such an industry, various tool can be used and one such tool is the Porter's Five Forces Model.

 Industry Analysis

In the third quarter of 2005, the worldwide PC market experienced its 10th consecutive quarter of double digit growth. The US market was dominated by five key manufacturers who controlled a large portion of the market share. There are many elements in this industry and a Porters Five forces framework is used to analyze it competitiveness. The Porter's five forces consist of 5 elements as explained in the following paragraphs.

 Threats of new entrants

The treat of new entrants in the Five Forces Model is high when it is easy for new competitors to enter a market, and low when there are significant entry barriers to entering a market.

Normally, costs and distribution are the factors that render entrance difficult. The pc industry in the American market is controlled by 5 main manufacturers namely; Dell Inc, Hewlett-Packard, Gateway, Lenovo/IBM and Apple Computers. This clearly underlines that the industry is consolidated and thus entry is very difficult. These five key manufacturers already own 40% of the market share internationally and 64, 2% domestically respectively and this is a clear indication that entrance is relatively difficult as these five firms already have a specific market for them and have a well established goodwill.

Moreover, each firm has strong brand names and has the right mixes of resources and control a portion of the market and this might also be a barrier to entry. Even though new firms are successful in entering the market, it will be very difficult to them to survive.

Consequently, as stated in the case study, the personal computer industry is likely to witness a slowdown in its growth rate by the end of 2009 and existing firms will be even forced out of the market. This is in itself an indicator that the entrance to such an industry is likely to be difficult. Moreover, firms also need technical knowhow and adequate capital to be able to enter the market and these resources are very costly and might be a barrier to entry.

Hence, in the light of the above explained, it is quite logical to conclude that the threat of new entrance is likely to be low.

 Threat of substitute products

The threat of substitute products in the Five Forces Model is high when there are many alternatives to a product or service, and is low when there are few alternatives from which to choose. For instance, the PC industry in US is a competitive industry with low level of product differentiation in the market

Subsequently, with technological advances, innovative products are being developed that have similar attributes to PCs. For example, PDA is becoming more and more similar to PCs. Each firm has derived a product to compete directly with competitors, thus acting as a substitute. Thus when Apple had brought into the market a new type of computer line accompanied by Front Row new media software, this was done with the only objective to provide a substitute for the famous Microsoft software Microsoft Media Center. Similarly, software named Urge was created to replace Apple's ITunes.

Hence, in the light of the above explained, the threat of substitute is low.

 The Bargaining power of buyers

Personal Computers are consumer products that it is consumed by everyone. Hence this means that the industry if full of buyers and thus the industry will tend to have a low buyer power. Subsequently, the fact that consumers are scattered all around the world and this decreases the buyer power as the concentration ratio is low. Hence, buyer power is much likely to be low in the US PC industry.

Another factor that support that buyer power is low is that of brand equity. Buyers have a good knowledge about the products offered on the market. However due to brand equity and high level of product differentiation, buyer power stays low.

Software incompatibility and high switching cost is another reason. Buyers normally prefer to remain with the same PC because of high switching cost and several inconveniencies like for e.g. software incompatibility especially for Apple computers.

Finally, prices tend to fluctuate drastically and consumers normally do not have a choice and they have to accept the price in order to remain up to date as Americans have an innovative culture. That is, when there a new technology available in the PC industry, buyers do not have much choice other than accepting the price as refusal will be being obsolete which is against American culture.

Hence, buyer power tends to be low in such an industry.

 The Bargaining power of suppliers

In the industry, suppliers such as Intel and Microsoft hold a significant amount of power. Conflicts between these suppliers will be disadvantageous to the industry. As stated in the case study, Intel technology specialized mainly in the supplying of micro processors and it has a market share of more than 50 % for the distribution of micro-processors in the industry.

The monopolization of the software fields by Microsoft seems to be very advantageous for PCs. But, however, Apple has not licensed its technology and as a result it has restricted the company's ability to grow into other areas seriously. Subsequently, by not using Microsoft software in its PCs has ultimately contributed to loss of market share and a loss in competitive advantage.

However, supplier power becomes also strong due to high brand equity and consumers normally demand PCs with consistent software. Hence, there is a difference when buying a Microsoft product and choosing not to purchase one due to its brand equity. Hence due to high level of differentiated product offering makes switching among suppliers difficult and thus supplier is powerful.

Lastly, the existence of few dominant software companies and high concentration on the PC industry makes the supplier power high.
Hence, in the light of the above explained, the bargaining power of suppliers is likely to be moderate.

 Intensity of rivalry

Strong rivalry is evident as 5 key companies dominate the PC industry like mentioned previously. Since all five companies control 64.2% of market share, indicates that competition level is likely to be high.

However, the opposite is also true. Weak rivalry occurs simultaneously as switching between competitors is costly to the consumers and once a company attracts and acquires its customers, it is rarely that they will switch without a great offer.

Subsequently, Dell, which is the leading firm in the industry, has recently (from 2004 to 2005, witnessed a fall in their sales of desktop PCs (as illustrated in exhibit 4) due to cut throat competition. This acute competition is driving away marginal players out of the market and this is in itself a clear factor of how high intensity of rivalry is.
Another key factor that supports the view that rivalry is high is the distribution channel adopted by the different players in the industry. Dell for example, sells computers online. Such a distribution channel has helped Dell to have considerable competitive advantage. Apple for instance, is continuously trying to improve its product and this is a clear indicator of how volatile the industry is.

Hence, all the above mentioned facts clearly supports that the intensity of rivalry is high in the PC industry.

 Conclusion

In the light of the above discussion, it can be concluded that the US PC industry is a very competitive one. New firms will only be successful to enter such an industry if they have the technical knowhow and the adequate capital. Competition and brand equity are very high in such a market. Hence, new firms will face huge difficulty in creating a market for themselves.

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