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