Porter 5 Forces Analysis of Computer Industry Essay Example

International Data Corporation (IDC), the worldwide PC industry which has enjoyed a rapid growth during the last two decades, is facing “tough realities in 2011 … [as] competition from new categories such as media tablets [is] heating up, [and] IT buyers are becoming more demanding” (International Data Corporation 2011). All these factors make the PC industry interesting, and invite scholars and business analysts for in-depth analysis of the industry to understand the main forces that are shaping its competitiveness.

1.1 Threat of entry Porter (2008) argues that the threat of entry “puts a cap on the profit potential of an industry … [and] incumbents must hold down their prices or boost investment to deter new competitors” (p. 81). The large capital requirements to enter the computer industry combined with established brand identities of the current incumbents make barriers to entry high, not to mention the economies of scale and distribution channels that incumbents enjoy which make entry barriers even higher. The current PC incumbents enjoy demand-side benefit of scale in the business sector where PC buyers prefer to buy products from large trusted companies, raising the level of entry barriers. On the other hand, the following factors lower entry barriers: the customer switching costs are small as PCs are open systems with standard specifications that can be met by any manufacturer, governments don’t, usually, restrict entry to the PC industry, and previous examples tell us that industry incumbents are not expected to show vigorous reactions against new entrants.

1.2 The power of suppliers PC makers either manufacture or buy the different components that constitute a PC. Most parts are available and can be

bought from several suppliers. Unfortunately, most if not all PC manufacturers do not have the core technologies that enable them to manufacture the most important part of the PC, the Central Processing Unit (CPU). Only two suppliers provide the CPU required in every PC; Intel and AMD, with Intel dominating about 80% of the market giving it a high bargaining power over PC makers.

An operating system is an essential complementary product for a PC; a PC will be useless if no operating system is installed on it. Microsoft’s Windows operating systems are used in most PCs giving the company the power to capture a high percentage of the PC industry’s profitability.

1.3 The power of buyers The PC is becoming a commodity-like, standardized product making it easy for customers to find equivalent alternatives and play vendors against each other. Switching costs between vendors are minimal and price-sensitive consumers can easily integrate backward into the industry by building their own PCs. All those factors play an important role in strengthening the bargaining power of the buyer.

1.4 The threat of substitutes “Substitute products … limit an industry’s profit potential by placing a ceiling on prices” (Porter 2008:84). The PC industry is highly affected by the advancement in technology and innovations. Many functions which could only be done using a PC, one day, can now be accomplished using many substitutes. The spread of smart mobile phones and media tablets, for example, encouraged PC users to rely either partially or completely on such products to do the same work they used to do using their PCs. The spread of new digital televisions with wireless

internet connections resemble another potential substitute of the PC.

1.5 Rivalry among existing competitors The rivalry among existing competitors in the PC industry is intense. Price discounting, continuous product enhancement, service improvements, and marketing campaigns are shaping the industry. The main competitors in the PC industry (HP, Dell, Acer, Lenovo, etc) are roughly equal in power and are competing for industry leadership. The PC industry is mature and industry growth is slow as reported by a recent IDC report (International Data Corporation 2011). Considering the large investments firms have put in the industry makes exist barriers too high. Besides, the industry suffers from price competition. The high fixed costs of the industry urges competitors to produce and sell in larger quantities to help distribute fixed costs across more units, forcing competitors to cut prices near or even below their average cost. The buyer low switching costs, as discussed before, is another cause of the price competition.