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Porter’s Five Forces analysis of the IT industry

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Porter’s Five Forces analysis of the IT industry

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Porter’s Five Forces is a business framework that helps entrepreneurs shape their strategy to drive profitability. The framework is a holistic way of looking at any industry and understanding the structural underlining drivers of profitability and competition.

Learn more about Porter’s Five Forces.

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The IT industry in 2021

According to the research consultancy IDC, the technology industry is expected to reach $5 trillion in 2021 which represents 4.2% growth, signalling a return to the trend line that the industry was on prior to the pandemic.

The three major industry groups within the IT sector:

  1. software and services: companies that provide internet services, software and IT services, search engines or social networks, software for business or consumer use (Google, eBay, Facebook, Accenture, PayPal, Adobe, Microsoft and Electronic Arts (EA);
  2. technology hardware and equipment: companies that produce routers, telephones and switchboards, computers, printers and cell phones (Apple, HP, Dell, Motorola, Cisco Systems, SanDisk and Western Digital);
  3. semiconductors and semiconductor equipment: companies that produce semiconductor equipment (Intel, Microchip Technology, Nvidia, QUALCOMM and Texas Instruments).

4 IT industry trends according to CompTIA, a leading tech association

The Cloud-first mentality

With flexibility and resilience as the guiding principles for future success, organizations will adopt a cloud-first mentality when it comes to building or upgrading IT infrastructure.

Technology as a driver for business objectives

Businesses are placing much more emphasis on strategic IT as opposed to the tactical mindset of previous decades. This means that technology is a driver for business objectives rather than simply playing a supporting role. 

Increased need for cybersecurity solutions

The complexity of new IT solutions creates a world of new opportunities. Unfortunately, it also creates a nasty problem for cybersecurity. (…) As companies become more comfortable with a zero-trust framework, they will also gain an appreciation for the new investments they have to make, the new processes they have to build, and the new skills they need to acquire.

Regulation is not avoidable

Whether it’s the debate over breaking up the largest tech companies, establishing clear legal ramifications and penalties for the exposure of sensitive user data, or figuring out how to thwart foreign countries from using social media to meddle in elections, the topic of regulation is front and center. […] the government is taking a closer look at all types of tech companies in an effort to rein in abuse and potential harm to the public – and assign accountability. [..] Regulation is not avoidable in the tech industry anymore.

Porter’s Five Forces Analysis of the IT industry

BUYERS How much influence do buyers have on the IT industry?

Is there a large number of buyers relative to the number of IT companies? hand-click YES / NO
The IT industry is expected to reach $5 trillion in 2021 which represents 4.2% growth compared to last year. Digital transformation and technology have contributed to this growth.

Are buyers both B2C and B2B? hand-click YES / NO
The IT industry caters to the needs of individuals and enterprises. According to this December 2020 report, the number of smartphone users in the world today is 3.5 billion, which translates to 44.69% of the world’s population. In 2019, there were over 2 billion computers in the world, including servers, desktops, and laptops. Although at home, we may prefer our smartphone, in the workplace, we do our work on PCs.

Do buyers face significant costs in switching suppliers? hand-click YES / NO

Do buyers need a lot of important information with regards to using the products? hand-click YES / NO

Does the product or service drive the buyer’s performance? hand-click YES / NO

Are buyers able to manufacture the product/service in-house? hand-click YES / NO

Are buyers highly sensitive to price? hand-click YES / NO

Are products unique to some degree? hand-click YES / NO

SUPPLIERS How much influence do suppliers have on the IT industry?

Are inputs (material, labour, services) standard rather than differentiated? hand-click YES / NO

Can companies switch suppliers quickly and easily? hand-click YES / NO

Do suppliers find it difficult to enter the IT industry? hand-click YES / NO

Is there a large number of current suppliers in the IT industry? hand-click YES / NO

Is the IT industry important to the suppliers? hand-click YES / NO

Is the supplier’s product indispensable to IT companies? hand-click YES / NO

Microsoft has 13,000 U.S. suppliers. If you’ve made the list, it’s a great accomplishment. But keep in mind that every couple of years, Microsoft goes out to market and does a request for proposal or RFP. This means that depending on its current needs, Microsoft will look for fresh suppliers with innovative products or services.

Is an IT company important as a customer to the supplier? hand-click YES / NO
Becoming a supplier for Microsoft means taking a slice of a $14.5 billion-worth budget pie that the software giant spends every year.

Microsoft is one of the leading IT companies in the world. Working with Microsoft is an accomplishment for any software supplier. But not every supplier can become a partner for Microsoft. The software giant has rigorous standards and high expectations for its partners. And once they’ve made to the list, it’s not over. Each supplier must undergo an annual review, receiving ratings of 1 to 5 for delivery, innovation, organizational health, quality, service supply-chain management and value.

NEW ENTRANTS Is the threat posed by new entrants high or low?

Are economies of scale important? hand-click YES / NO
Economies of scale is achieved when costs are lowered and production is increased. This happens because costs are spread over a larger number of goods.

Are economies of scope important? hand-click YES/NO
Economies of scope is a concept which states that the unit cost to produce a product will decline as the variety of products increases. Namely diversity of products lowers the costs of producing them. Apple has the manufacturing capacity to design, manufacture and launch other products besides smartphones.

Would a new entrant be competing with established brands? hand-click YES / NO
Any newcomer to, let’s say, the semiconductor industry would go against the market leaders Intel or AMD. They would need to spend significant amounts of money on advertising and promotions to attract customers.

Is a large amount of up-front capital required to enter the market? hand-click YES / NO
New entrants in the semiconductor industry must develop strong research & development departments and large amounts of capital in order to compete with the patents of established companies.

Are profit margins in this market currently high? hand-click YES / NO
A 2019 McKinsey report shows that profits in the semiconductor industry have been growing strong in recent years.

Are switching costs for customers high? hand-click YES / NO
Embedded switching costs make it difficult and costly for customers to move from one brand to another.

Are there other barriers to entry: patents, regulatory requirements, experienced workers etc? hand-click YES / NO

Is a new entrant expecting strong competition from the existing players? hand-click YES / NO

SUBSTITUTES Is the threat posed by substitutes high or low?

Are there available substitutes? hand-click YES / NO

Do customers incur costs in switching to substitutes? hand-click YES / NO

Do available substitutes have performance limitations? hand-click YES / NO

Do available substitutes have high prices? hand-click YES / NO

Are customers likely to go for substitutes? hand-click YES / NO

Is it easy to replace one product with a substitute? hand-click YES / NO

EXISTING COMPETITORS What advantages do competitors have?

Are there many similar competitors in the IT market? hand-click YES / NO

Are market shares equally distributed among competitors? hand-click YES / NO

Are costs high? hand-click YES / NO

Are the products being sold commodities, making it difficult to add value and have a high-margin? hand-click YES / NO

Are exit barriers high? hand-click YES / NO

Products on offer are highly complex and require significant customer-producer interaction. hand-click YES / NO

Is the industry growing rapidly? hand-click YES / NO

The IT industry is changing rapidly due to fast-evolving technology.

Conclusion

According to Porter’s Five Forces business framework, the IT industry landscape has the following features:

High competition

High bargaining power of buyers

Low threat of new entrants

Low bargaining power of suppliers

Low threat of substitutes

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