Threat of new entrants
The computer industry is quite technology and capital intensive. In order to compete firms need large and advanced assembly plants that require lots of funding (possible sunk costs), and also new firms will need to finance a large research and development department in order to create new high-tech and at the same time low cost products. However, innovative firms, such as M-tech in US, that bring out differentiated products, such as custom painted laptops (8) are able to carve out their own niche market. However, these niche firms do not pose a serious threat to mass computer manufacturing firms such as HP, Sony, Dell, because niche firms charge a high value added premium ($300 for a paint-job) on their services and therefore would be outside of the price range of an average consumer. So in the context of HP, Dell, Sony, etc. the threat of new entrants is relatively low because new firms entering the “consumer-orientated hardware sector” would not be able to survive because the existing firms practice cost-based pricing, and since they have lower average costs (due to economies of scale) they, therefore, have also lower prices than newly entered firms.
Threat of substitutes
Computers are used for almost every aspect of ones life. Computers are used to write books correspond with other people, even to look after money - a convenience of doing all those things without getting off the seat. For example, instead of going to the bank, then going to the Post Office and then going to the shops consumers can do them all on a computer on-line as the opportunity cost (time wise) is lower.
The biggest competition that computers face is in relation to gaming. People could buy a Sony Play Station 3, Nintendo Wii, or a Microsoft Xbox to play games on, but they’ll still have to buy a computer to send emails, do shopping, etc. A particular threat to laptops are the technological advances in wireless devises such as Blackberry that enable people to surf the internet, write documents, and even watch movies online. However, their pros are also their cons as their small screens, fiddly keypads and lack of USB ports limit their capabilities. Furthermore, the emergence of super small (Asus Eee) and super light (Apple MacBook Air) laptops has decreased the threat of wireless devises. Overall, the threat of substitutes is fairly low, with the potential threat coming from the continuing development smart-phones and PDAs.
Threat of buyers
Due to the relatively high number of computer manufacturers and the almost perfect knowledge of the sellers, consumers can switch relatively easily. Also with the emergence of cheap Asian manufacturers such as Acer, the consumers have been able to drive the price down considerably. They were also helped by the fact that other than the brand name, almost all computers of equal specification are the same. This means that the threat of buyers is relatively high.
Threat of rivalry
Large number of firms in the industry with growing market share and the growth of Asian manufacturers lead to higher rivalry because the firms need to compete for same number of customers who buy computers (durable goods) quite infrequently. To illustrate; the computer industry in the US is becoming less concentrated (9,10) with HP having 19% in 2006 and 19.2% in 2007, and Dell having 30.5% 2006 and 14.6% in 2007. This decline has enabled Asian firms such as Lenovo to increase the foothold in the US market (from 4.5% in 2006 to 8.1% in 2007). This in turn forces HP and Dell to offer promotions (11) and participate in heavy advertising in order to get consumers to buy their computers. Overall, the threat of rivalry is quite high in the computer manufacturing industry. Especially in the US where the diminishing power of Dell and HP, and the growth of Acer and Lenovo means that the rivalry could be volatile and intense because of the different cultures, histories and philosophies.
Is IT industry competitive?
The competitive rivalry of the IT industry is extremely high, mostly due to the intense rivalry within the industry itself rather than due to any external factors. Such intense competition puts strong downward pressure on prices and a strong upward pressure on Research and Development. This, coupled with the near complete buyer sovereignty forces firms to manufacture higher specification computers whilst keeping the prices down.
Evaluation of the Force Model
The model helps firms to understand both the strengths of their competitive position and the strength of a position they are looking to move into. Therefore, the implication of the Forces Model is that with a clear understanding where the power lies, the firm can take a fair advantage of a situation of strength, improve a situation of weakness and avoid taking the wrong steps. However, possible limitations of the model are that it is only designed to analyse the individual business strategies and so it does not take into account the game theory, synergies, interdependence of firms and that buyers and suppliers are related and could collude(12). Furthermore, the model does not take into account the sociological perspectives, that industries could be attractive because certain companies are in there (MP3 industry and iPod) and that sometimes it is possible to create completely new industries (niche markets) instead of selecting from the old ones.
Bibliography:
1) Sloman, J.and Hinde, K. (2007) “Economics for Business”, Pearson Eductaion, ch13.
2) Apple's MacBook Air Is Beautiful and Thin, but Omits Features -
3) HP launches SOA governance services software -
4) Samsung Electronics, Hynix to Join Forces in Chip R&D -
5) Gartner: HP Pulling Away From Dell In PC Market Share –
6) Memory-Chip Prices Climb to Highest in Almost Three Months –
7) Toshiba's computer chip unit hit –
8) M-tech website –
9) Lenovo Makes a Name for Itself
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11) Free laptop with 3's mobile broadband –
12) Did Microsoft and HP collude on Java? -
