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The Porter Analysis

Essay by   •  September 7, 2010  •  Case Study  •  3,464 Words (14 Pages)  •  3,000 Views

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Introduction

To perform the Industry Analysis it is better to follow Michael Porter's five forces model. This analysis framework was created so that it helps managers in their task to analyze competitive forces to the company. (Hill & Jones 80) This model is only one of the models that can be used for this task but it is one of the more popular models. The five forces that we will have to look at for this model are (1) the risk of new and potential competitors; (2) the bargaining power of suppliers; (3) the threat of substitute products; (4) the bargaining power of buyers; and (5) the degree of rivalry among established companies within an industry. (Hill & Jones 80)

Barriers to Entry

The first force in Porter's Five Forces Model is Entry Barriers. These factors are those that make it harder or easier for another company to enter into the industry. High barriers to entry will keep potential competitors out of the industry and low barriers to entry will give an opening for competitors to enter into the industry if the industry returns are high enough. (Hill & Jones 82) The fewer competitors in an industry the more the existing companies can take advantage of higher prices and better returns.

One barrier to entry is brand loyalty. Brand loyalty is very important for the sales of IBM. When personal computers first came out you had to choose from IBM or Apple. Both computers were great machines but when IBM became a better-known computer the name was very recognizable. Today your choice in computers is much more extensive. Even though there are many more brands to choose from IBM is still a popular name. If not for it's own products it is for their platform it has. IBM compatible is a widely used term when talking about computers. Many people when looking for a new notebook computer will then think about the name first. You may think well if the other computers are compatible then why not just get something that is cheaper? This is an option but the other way of looking at it is the name brand will be a better product.

A second barrier to entry is switching costs. When IBM and Apple were the only computer systems to choose from people had to make a choice. When you went to buy one system then you had to buy all the software that went along with that system. Ultimately, IBM became the more popular system and there was more software produced for IBM computers rather than Apple. (Hill & Jones 105) So now when consumers are searching for notebook computer that will help you out in the new work environment you are more likely to stay with the brand that they picked originally or another brand that is compatible to that system. Since IBM became the more popular computer to start with, switching cost became much higher if you wanted to switch to a Macintosh, an Apple operating system. All the software that you owned for the IBM computer would be useless for an Apple computer. That means along with purchasing the new computer itself you would also have to repurchase all the software that you had on the old computer in the new Macintosh format. Also the two computers work slightly different, so you may have to take a class or two to help you understand how to work this new computer that you purchased. Overall that is much more money then it would be just to buy another computer compatible with the same system that you already own.

A third barrier to entry is one of imitation and absolute cost advantages. This is were IBM has lost it's advantage. IBM has created a computer that is very open for imitation. There are many different computers that are compatible to the IBM format. Each new company that has entered the market has realized that IBM had the more popular system and then tried to copy it. These new companies were producing very similar computers at the same cost but charging less. (Hill & Jones 207) This in turn caused IBM to loose their advantage over new competitors. However when IBM went into the notebook computer industry it became innovative and produced computers that were similar to their normal PC. They offered many features that most companies could not put on their laptop because of lack of room. IBM also is able to make one of the smallest and lightest notebook computers. The ThinkPad 560 comes with a 100-MHz Pentium processor, 8MB of RAM and 810MB hard drive also with an 11.3-inch screen. This is all packed into a package that is 1.2 inches thick and about 3 to 6 pounds, depending on your attachment setup. The best features that many like about this version are there is a full size keyboard and screen. It can be hooked up to other hardware or connected to a PC, network or printer. (www.cnet.com) Most other competitors cannot come and make a notebook computer at that weight with so many of the features that IBM is offering.

Bargaining Power of Suppliers

The second of Porter's competitive forces is the bargaining power of suppliers. Suppliers can become severe threats to any company when the business depends on them for their products, but the supplier does not depend on the company for business. Suppliers are a threat when "they are able to force up the price that a company must pay for its inputs or reduce the quality of inputs they supply, therefore depressing the company's profitability. If suppliers are weak, this gives a company the opportunity to force down prices and demand higher input quality" (Hill & Jones, 2001).

IBM has numerous amounts of suppliers for their laptop computers. A major supplier is Intel, the world's largest manufacturer of microprocessors. The industry standard for computers runs on Intel's microprocessor family such as the Pentium series microprocessors. IBM has little choice but to use an Intel microprocessor for their laptops. Intel currently possesses about 85 percent of the market so they have supplier power over IBM. This puts Intel in a very powerful position in this situation. There are very few substitutes for Intel's microprocessor, so IBM has little choice but to deal with Intel. Intel has the ability to raise prices to any level that satisfies them. This level would not prevail in a highly competitive market for microprocessors (Hill & Jones, 2001).

IBM does set some standards for its suppliers however. Once suppliers enter into a contract with IBM, they must follow specific instructions given to them. These instructions include document requirements (eg: packaging list, billing invoices, etc.), packaging and labeling requirements, shipping instructions, and even country of origin marking (See Appendix A). IBM also has instructions for exports to IBM corporations in the United States (www.ibm.com).

Suppliers

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