Porters Five Forces Model

Porter five forces model, developed by Michael E.Porter of Harvard University in 1979, holds
the purpose to analyze the industry in order to determine the level of intensity reardin the
competition and attractiveness of the industry. !he attractiveness of an industry is measured in
terms of profit" more profitability means a more attractive industry and lo# profitability means a
lo# attractive industry.
Porter referred to these forces as micro environment rather than macro environment because
these forces are nearest in the sense of affectin the oranization. $ranizations have to re%assess
the mar&et if any of the forces chane, it does not necessary that the oranization should leave
the industry if the profitability is lo#, because most of the oranization are ma&in ood profits
by applyin their core competencies to ain competitive ede over their rivals and increase their
profits.
!he #ord '(tratey) is very common in this advanced era of the business and technoloical
#orld, it is used even in our daily life routine, you may have heard at times that lots of people
discuss about strateies *plans+ to achieve somethin. ,ou must be thin&in that strateies are
developed in dreams or common sense by hiher manaement of the company but that is not the
case, even the best of the strateies al#ays comes after proper evaluation of internal and e-ternal
environment of the company.
!he strateies are made by strateists to achieve ob.ective or oals to allo# the business to
compete in industry. Porter five forces model of competitive analysis is a #idely used approach
for developin strateies in many industries. !he intensity of competition varies across the
industries. !he intensity of competition is hiher in lo# return industry as compared to hih
return industry due to less re/uirement for capital and common products that re/uire minimum 0
1 2 *0esearch 1 2evelopment+ and efforts for production.
3ccordin to Porter, the nature of competitiveness in a iven industry can be vie#ed as a
composite of the follo#in five forces4
1. 0ivalry amon competitive firms
5. Potential entry of ne# competitors
6. Potential development of substitute products
7. 8arainin po#er of suppliers
9. 8arainin po#er of consumers

Figure: Porters Five competitive forces
Threat of New Entrants
!he telecommunications industry is comprised of an enormous number of technoloical firms.
!he evolvin nature of innovation and desin increases the threat of ne# competitors. !herefore,
the use of technoloy, fi-ed costs, brand a#areness, 012 costs, the economic scale and scope
#ith overnment policy comprise a hih level of threat to :o&ia. ;irst, the emerin trend in the
mar&et is 6<, #ith hih fi-ed costs, ma&in the mar&et very competitive and difficult to enter.
(econd, brand a#areness in this industry is also hih because customers believe that the better
brand can provide stability, /uality, and added services. !hird, 012 costs are aain very hih
both in the 6< and <(M mar&et. =t is important to stay abreast of trends and create ne# fashions
because customers al#ays #ant the ne#est technoloies and desin. ;ourth, economies of scale
and scope are hih due to lare company>s ability to mass produce products to receive larer
profit marins alon #ith the ability to limit pricin to deter smaller competitors from enterin
the mar&et. ;inally, overnment policy stronly influences the introduction of ne# technoloies
that re/uire certain advances in infrastructure to provide innovative functions. 3n additional
threat can be traced to :o&ia>s relationship #ith select partners. !he nature of the relationship
can effect :o&ia>s product distribution, if the service provider offers poor service. $n the #hole,
:o&ia>s threat of ne# competitors is very hih.
Power of Suppliers
!he po#er of suppliers relates to the suppliers> level of intensity, the chip ma&ers leverae, the
transfer cost of appliances, the transfer cost of s#itchin chips or soft#are, and the deree of
partnerships. ;irst, the supplier>s level of intensity is lo# because :o&ia uses its o#n factories to
ma&e its product. ?hen :o&ia order outside parts, it can receive ood deals because it buys in
bul&. (econd, the technoloy of the chip ma&ers is medium because it is held by a select roup of
firms includin !e-as =nstruments *!=+, =ntel, and Motorola. !hird, the transfer cost of appliances
such as the &eypad is lo# due to the availability of manufactures of these specific items. ;ourth,
the transfer cost of s#itchin ships is hih. !he transfer cost is directly related to the costs
associated #ith s#itchin desin and manufacturin functions. ;ifth, the po#er of net#or&
suppliers in the <(M area is medium. @ustomers can chane to other suppliers easily usin their
oriinal cell phones. :et#or& suppliers can>t control or handle all of the communication
net#or&s industry. (i-th, the po#er of information technoloy suppliers in medium. 3 lare
company #ants to reduce costs by sinin #ith an =! supplier so that =! suppliers #ill become
more important durin this trend. ;inally, the 3!1! partnership is hih because of the ris& pf
loosin the partnerships" therefore, loosin the mar&et share. 3ll in all, the po#er of suppliers is
rated in the medium rane.
Power of Buyers
!he areas to be discussed include the buyers> level of intensity, transfer costs, the buyers>
information, and for#ard interation po#er, loyalty, choice and finally the purchase /uantity.
;irst, #e have the buyers> level of intensity #hich is relatively lo#. :o&ia is a lobal company
#ith customers located in various countries around the #orld. (econd, the transfer cost is also
/ualified as a lo# threat. @ustomers can easily use other brands. !herefore, customers do not
need to be concerned #ith transfer costs. !hird, the buyers> information is also hih due to the
advent of the =nternet #here customers> have access to an unlimited amount of buyin
information. @ustomers can compare brands #hile educatin themselves on the ne#est
technoloical offerins. ;ourth, the buyers> for#ard interation po#er is mar&ed as lo# because
of the buyers> ability to select for#ard and bac&#ard compatible products. ;ifth, the buyers>
loyalty is rated in the medium rane. !his is directly related to the improvement in technoloy.
@ustomers> #ant the ne#est in fashion #ith the price bein the limited factor. =f another
manufacturer produces the product that customers> desire, then price and service may be the only
thin customers> are loyal too. (i-th, the level of buyers> choice is very hih. ?ith constant
innovation, the consumer is continuously offered ne# products #ith the ne#est technoloies.
;inally, the separation bet#een the end user and the company user or dealers is necessary. !he
end user purchase /uantity is lo# because that are enerally limited to usin one phone.
Ho#ever, a ro#in trend has centered on chanin phones yearly, to &eep up #ith the latest
desins and technoloy. !he company or dealer purchase /uantity is hih due to their desire to
distribute and sell the product and a mar&up cost. =n the 3merican mar&et, #ireless net#or&
3!1! and (print are handlin the industry because of the special system. !heir roles are both
supplier and buyers. =n most <(M systems areas, the net#or& companies only can become
buyers. 8y the lare the po#er of the buyer is rated as a hih averae.
Product Sustitutes
!he ma.or substitutes for the mobile telephone industry can be influenced by technoloical
products that include paers, #al&ie%tal&ies, cellularA=nternet P23 devices, toll phones, 6<
products, and smartphones. 3 ma.ority of these substitutes are outdated technoloies that no
loner classified as stron substitutes for the mobile phone. $n that note, the introduction of
consolidated products has stronly positioned themselves in the mar&et. ;or e-ample, the
smartphones serves the function of a cell phone, #ireless =nternet device, paer, and P23. !his
ro#in trend is not a lare threat because of the innovation behind the partnerships as #ell as
innovation of the products.
!ntensity among "ivalry
!he intensity amon rivalry are functions based on loo&in at the ro#th of the industry, capital
intensity to produce the product, product differentiation, brand differentiation, transfer cost,
information comple-ity, and competitiveness. ;irst, the ro#th industry is hih. !he ro#in
trend is a shift to#ards ma&in products in line #ith 6< capabilities, ro#in at a rate of 5BC
annually. <(M mar&et sale is still ro#in in the developin countries in 3sia and is a very lare
business opportunity. <(M cell phones are the main mar&et for cell phones producin
companies. !hese companies earn most profits from these <(M areas. (econd, the capital
intensity is very hih for the industry, for 012, for development, and for manufacturin. !hird,
the level of product differentiation in shape and desin is very hih #ithmany companies
producin their o#n version. ;unction of the product is ran&ed at the medium rane because of
the ability of companies to reverse enineer products. ;ourth, brand rivalry is very hih due to
the importance of brand a#areness sho# four main characteristics. 1+ Easy to use 5+ product
desin 6+ /uality and stability,and 7+ customer service. ;ifth, the information comple-ity is
mar&ed as bein in the lo# rane because consumers can educate themselves easily. ;inal, the
level of competitiveness is hih. Dery fe# firms control the lobal mar&et. Many firms such as
Motorola, and Ericsson, are tryin to reach the number one position in the industry. =n various
countries, many small companied #ant to rab hold of a piece of this mar&et comprised of
products offerin e-clusive desin to attract ne# customers. <enerally the competitiveness of the
mar&et can be summarized as hih for the intensity amon rivalry section. !he subse/uent #ill
provide and in%dept analysis of the t#o main competitors for :o&ia.
#ompetitive $nalysis
3cross the lobe, telephone service providers are e-pandin net#or&s for #ireless and #ireline
communications. 3nd, the industry has also underone dereulation #hich spa#ned a #ave of
smallerreional net#or& operators. 2evelopin nations have stepped up efforts to e-pand basic
telephone service.!he lobal telecom e/uipment mar&et bro&e E659 billion in 1999 and #ill
continue to ro# by about 19C annually. !he U.(. telecommunications e/uipment industry re#
to E91.9 billion in 1999. 3s the #ireless sement has heated up, so has competition to be the top
provider of mobile stayin ahead of Ericsson, #hich has focused on becomin the industry
leader in #ireless infrastructure e/uipment sales.
Ericcson
Ericsson has al#ays been a runner%up to :o&ia in terms of its telecommunications technoloies.
Ho#ever, it #as lac&in in desin, eronomics and user%friendliness. Ericcson successfully
established itself amon the top three companies in the industry. Ericsson has successfully
established itself amon the top three companies in the industry. !hey had reat success in
Europe and 3sia, but its :orth 3merican product line proved une-citin for the consumer. =n
3pril 5BB1, Ericcson made a very interestin decision opened the
door to directly compete #ith :o&ia, not only in terms of communication technoloy, but also
#ith their innovative desin and 8lue!ooth technoloy interation. Ericsson has formed a
strateic alliance #ith (ony Electronics @orporations and areed to share technoloies in the
field. (ony a consumer electronic iant, already has not only a number of fashionable cellular
phones and accessories, but also a reat customer base, and reconition and brand loyalty. (ince
the formulation of this .oint%venture, both companies came out #ith a ne# line of technoloically
advanced and very user%friendly phones. !oday, Ericcson phones are reconized more not only in
the European and 3sian customers but also reatly #elcomed by the recently discovered :orth
3merican mar&et.
Motorola
Motorola, the former dominant company in the telecommunications industry, is currently
strulin from fallin sales and reduced mar&et share. !o find the reason one does not need to
loo& bac& very far. =n 199F, :o&ia introduced the ne# diital standard #hich not only
dramatically improved the /uality of voice communications, allo#ed for smaller phones, and
improved battery life, but also became the foundation for the ne# standards #hich eventually led
to the development and introduction of 5<, <(G, 5.9< and 6< *not all standards are available in
all areas+. Motorola failed to reenineer their products and adopt the ne# diital standard. !hey
seceded to stic& to their analoue 'flip) phones #hich shortly became unpopular due to their
user%unfriendliness, bul&iness and enerally problematic nature. (ince then, :o&ia>s mar&et
share re# dramatically and shortly overtoo& Motorola>s domination. ;e# years after the s#itch
to diital, Motorola unsuccessfully tried to reain their position in the telecommunication
industry buy #as not able to do so. @onsumer behavior had chaned. !hey no# demanded slic&,
stylish and user friendly phones, #hich Motorola could not deliver.