Monday, November 06, 2006

Management Lite & Ezy 13 – Porter's Five Forces

Michael Porter is one of the most famous management gurus. He coined the term 'value chain' which has been overused today. However, I find his articles extremely dry and difficult to read.

Anyway, I will discuss his analysis of Five Forces here. According to Porter, there are five forces which determine the attractiveness of a market. They are:

The bargaining power of customers

The bargaining power of suppliers

The threat of new entrants

The threat of substitute products

The intensity of competitive rivalry

Let's look at an example – the PC industry.

Bargaining power of customers

The PC has become a commodity. There is no brand loyalty among PC users. The use of industry standard hardware and software means a user can easily switch from one brand to another.

Bargaining power of suppliers

Intel and Microsoft have tremendous bargaining power against the PC makers (even though they are challenged by AMD and Linux lately.)

New entrants

Virtually every components parts of a PC – motherboard, hard disk, DVD drive, monitor, battery (for notebook) etc – can be sourced from outside. Operating system can be licensed from Microsoft or Linux vendors. This means new competitors can enter the market fairly easily.

In fact, even desktop casing can be bought off-the-shelf. All a PC maker needs to do is to stick its own logo.

Substitute products

I don't see substitutes for PC coming to the market anytime soon. However, gamers may prefer PlayStation, Xbox or Nintendo.

Intensity of industry rivalry

Dell, HP, Lenova, Acer, Toshiba, NEC, Fujitsu, Gateway, Asus... you name it. These are the better known players in the PC industry. And then there are plenty of lesser known manufacturers. The rivalry is intense.

Based on the above assessment, we can conclude that PC market isn't very attractive. This probably explains why IBM sold its PC business to Lenova.

Kotler & Keller, "Marketing Management", 12th edition

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