Five-Force Analysis on the Personal Computer Industry.doc

five-force analysis on the personal computer industrymichael e. porter explains in his how competitive forces shape strategy that the state of competition in an industry depends on five basic forces: new entrants, suppliers, buyers, substitutes, and industry competitors. in this paper, i analyzed the competition in the personal computer (pc) industry using porters five-force analysis.1. buyers (strong)buyers of personal computers are businesses, governments, educational institutions, and individuals. large businesses, governments, and schools, which buy computers in large volumes, have the power to bargain on price, quality and service. personal computer buyers are price-sensitive. however, buyers have less power when the switching costs and brand-loyalties are high. thus, pc manufacturers can reduce a threat of buyer power by differentiating their products. an example is apple computer. apples unique operation system and its computers specifically targeted to publishing and designing industry prevent their buyers from switching to competitors products. its sleek product design represented by imac and ibook also acquired many fans and increased brand-loyalty. but, despite several ways in which manufacturers have differentiated their products and found ways to increase switching costs, customers still see units as very similar and thus choose primarily on price.2. suppliers (moderate)components for manufacturing personal computers are the microprocessor, motherboard, memory storage, and peripherals such as monitor, keyboard, or mouse, along with bundled software. most of the components are highly standardized and widely available from a large number of suppliers. thus, suppliers of those similar components do not have much market power vis-a-vis the pc industry. however, software makers hold significant power compared to pc makers that want to sell their computers with preinstalled software. for instance, microsoft, which does not have a competitor for its windows software, dominates the industry and thus has a strong power to influence the pc industry. intel also has a significant market power as it is a single major supplier of microprocessor and has an 80% market share.3. industry competitors (strong)competition among existing pc manufacturers is fierce. the main pc vendors in the u.s. are hewlett-packard, dell, ibm, gateway, and apple. japanese companies such as fujitsu, toshiba, nec, and sony also have large market shares. however, some companies such as ibm and apple focus more on innovation while others such as dell focus on distribution channel and service, which creates differentiation to some extent. the technology paradox holds in the pc industry. high-tech companies such as pc makers thrive when they provide ever greater amount of advanced technology, while the price sharply falls (54, hodgetts). since the quality of a pc is largely determined by the microprocessor and application system installed, the profitability and prosperity of the pc industrys is dependent of the profitability and prosperity of these suppliers. according to standard&poors, intel and microsoft together spent approximately 15.5% of their combined sales in 2001 (13.4% in 2000 and 12.6% in 1999) on research and development (r&d), while pc manufacturers allocated roughly 2% to 5% of their sales to r&d (1.5% to 2% according to applecomputer, 2002, harvard business school). as the pc has become a more commodity-like product, price-competition has become severe in the industry. the price of pcs has declined since 1992 when compaq (now acquired by hewlett-packard) successfully cut two-third of its manufacturing costs. cost-cutting is now critical for pc producers to cover the decreasing profit margin. low-cost production at dell contributes its positive growth rate of 15.5% (second quarter, 2002), while all other major firms are experiencing negative growth rates. another important aspect of competitive advantage is globalization. many pc makers in the us now earn more than 40% of their revenues in international markets. although pc markets in the us, europe, and japan have matured and the demand has slowed down, demand in asia-pacific (except for japan) is expected to grow. the effects of intense competition are beginning to be felt as companies exit via selling to other companies or simply exiting the industry altogether. according to standard&poors, many industry forecasters predict that the top 5 venders would hold a 70% of the market share in the near future4. new entrants (weak - moderate)the threat from new entrants to the pc industry is weak to moderate. the relative technology and know-how needed to make pcs is low. selling pcs directly to customers using internet is also possible. however, existing large companies have established strong supply chains, distribution channels, r&d, marketing, and customer support services to create moderate entry barriers. furthermore, as many personal computers now sell with an operating system and major application software installed, switching cost for customers to a new computer with different software is not low. thus, entrenched firms that have already acquired strong relationships with the software industry have an advantage that makes entry by new firms difficult. as the pc industry in the us is close to the maturity stage, the number of entrants has slowed down and industry concentration increased. the results are lessened entry, which has led to a more concentrated industry. in 1992, the top 10 world wide vendors accounted for approximately half of the market, while in 2001, top 5 vendors held nearly 45% of the market share.5. substitutes (weak-moderate)anything that may replace personal computer is a substitute, which creates a threat to the pc industry. for example, a cell phone with an internet web browser and emailing function is a substitute for the pc for people who use a computer only to use those functions. word-processor/typewriters and calculators are also substitutes. xbox live, released by microsoft in 2002 to compete with sonys xbox, has a dvd player, high-performance games, and a standard ethernet network card for high-speed internet connections without pc hardware, which is a substitute of pc especially for home users. however, the pc is still a necessity in todays business, educational, or government organizations, which are high-volume customers. the pc actually has taken many functions away from other products to become a substitute for products such as the tv, newspaper, magazine, book, videogame, cd player, dvd player, photo album, calculator, word-processor, telephone, fax machine, and so on. however substitutes for computers do not have as many functions as a pc and are not close in performance. thus, threat from substitutes is weak to moderate in the pc industry.from the five-force analysis, i conclude that the pc industry is fairly attractive for entrenched, global, leading companies but not for new firms. although cost of assembling a pc is low, the barrier to entry is fairly high because of the economics of scale and brand-loyalty. adversely, however, the high barrier to entry provides strong competitive advantages to existing large companies. pc manufacturers should especially focus on buyers and industry competitors, whose power reduces profits in the industry. (see appendix)ap