Theoretical framework Porters Five force model proposes that an Industry’s structure depends on five competitive forces. These forces are:
1. Threat of New entrants
2. Bargaining power of Suppliers
3. Bargaining power of Buyers
4. Threat of Substitutes
5. Intensity of Rivalry
The Porter’s 5 forces help in determining the profitability of the current and new firms in the sector. We will use the example of the application of the forces in an Indian IT industry .
Threat of New Entrants
The threat of new Entrants is affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it. According to Porter, new companies bring new resources and can reduce product prices and further shrink the profitability of the industry. The threat of new entrants is extremely high for Indian IT Sector owing to low setup cost and requirement of infrastructure. Due to that , there are thousands of new start-ups in IT industry which started in last few years servicing clients worldwide.
Bargaining Power of Suppliers
Bargaining power of suppliers depends on the number of spulliers concentration, the amount of work and threat of forwarding integration. According to Porter, suppliers are powerful when they are concentrated and there is an increased threat of forwarding integration. Supplier’s strength is also driven by other factors like a number of suppliers available for each key process , the uniqueness of their product or services, their strength and control over your business and switching cost. The suppliers for Indian IT industry consists of IT infrastructure and Hardware providers, transport service providers, Recruitment firm /engineering colleges and office space suppliers. The bargaining power of suppliers is very low since they are fragmented and are providing services without much differentiation.
Bargaining Power of Buyers
The easiest way to access the bargaining power of buyers is to determine how easy it is for buyers to drive the prices down. This is driven by a number of factors like Importance of each individual buyer to your business, the switching cost from your business to that of your competitors or availability of substitutes for your product and services. The powerful buyers can are in position to dictate terms to you . When you deal with few powerful buyers, then they are often in a position to dictate terms to you. When it comes to niche services, the Bargaining power of Buyers is low otherwise for conventional IT services, the bargaining power is high as there are many IT firms in India who compete for similar projects
The Threat of Substitutes
If customers find a different way of doing what you do , it is called threat of substitution. Your power is weakened if substitution is easy and substitution is viable. The threat of substitute is medium as new geographies like China and Philippines are emerging and gaining ground fast due to low cost and availability of skilled workforce.
Competitive Rivalry is driven by the capability and number of your competitors. If you have many competitors, and they offer equally attractive products and services, then your power is weakened, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have increased strength. In other words, the Competitive rivalry is high when there is just few business equally selling a product or when consumers c
an easily switch to competitors offering service or when the industry is growing. When the competitive rivalry is high, you need to intense advertise and get into price wars that can lead to a severe impact on business’s bottom line.