Porters Five Forces analysis for IT industry
Wipro Technologies is a global information technology (IT) services company. It provides custom application design and development, IT consulting, systems integration, technology infrastructure out sourcing, software products and BPO services. Michael Porter's Five Forces Model looks at five key areas- the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. Threat of new entrants: New entrant in the market may have an effect on share of older counterparts Threat of substitute: Due to technological advances, Quality constraints or cost effectiveness there can be a threat of the substitute on the industry. Bargaining Power of customer: This is the bargaining power of the customer -one who is consumer of the goods.
Bargaining Power of suppliers: This is the bargaining power of the supplier -one who supplies sources that are needed for finished goods.
Comparative Rivalry within Industry: It tells about extent of competition in between firms in an industry. Porters Five Forces helps to analyse how these forces act together to cause the company to increase or decrease profitability of the company. The strategy of the company should be to influence these forces to maximise profitability. Hence below is a study of the IT industry and study of profitability in custom application design development, systems integration, technology infrastructure management segments of IT
Threats and barriers to entry
1 Economies of scale and Capital Investment Requirements:
IT requires very low investment and hence we have hundreds of startups starting every year. While it is easy to invest and start a software company sustaining growth does not come easy. All these start-ups also play in an area where Wipro does not compete like low value projects or in subcontracted work. Hence they are not a threat to the profitability of Wipro. India is the favourite destination for off shoring Information Technology (IT) and IT enabled Services. The Indian IT/ITES industry commands more than 50% of global ITES off shoring market share. The IT/ITES exports are set to cross USD 60 billion by 2010 and Nasscom (The National Association for Software and Services Companies), estimates that the industry will account for USD 63.7 billion of revenues and direct employment is expected to reach nearly 2.3 million. The IT industry contributes around 26 per cent of India's total exports and was around 6.1 percent of India's GDP for financial year 2009-2010 (NASSCOM, 2010).
2 Customer switching costs
Wipro works across verticals like telecom, BFSI, Media and Communication, Automobiles, Government, Technology, Manufacturing, Energy, Healthcare, Hospitality etc and has several ODC or offshore development centres for nearly all top companies in the world. These offshore development centres have thousands of resources working with multi year projects earning millions of dollars of revenue a year. The cost of shifting or switching even a part of these projects to other companies would involve huge set up, transitioning costs with no guaranteed results. Wipro has quality certifications like Cmmi Level 5, PCMM Level 5,BS9977 etc and new entrants will face a barrier in this regard. Global contracts will not be given to companies with the lack of certification. The lack of security certifications will cause customers to have security related concerns while sending data offshore.
3 Access to distribution channels and technology
This poses no difficulty. Many top business unit heads have previously quit from Wipro and spawned off their own company which has grown and sometimes taken a part of the market share of Wipro. Since the industry thrives on knowledge workers when a senior person leave he takes access and knowledge of customer base and customer contacts with him. The Internet is present everywhere and software technology in the...