Porters 5 Forces

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PORTER’S FIVE FORCES 4
 
Power of Suppliers
 
Criteria
Level
Effect on Power
Effect on Profit
Difference of Inputs
High
Increases
Decreases
Cost of Switching Suppliers
High
Increases
Decreases
Threat of Forward Integration
High
Increases
Decreases
Supplier Concentration
High
Increases
Decreases
 
Difference of Inputs
​Product differentiation within inputs in the tech industry is largely dependent on how recently the input has been developed (the extent of which it is considered cutting edge). In cases where component innovations are the property of the supplier prices increase to compensate. However, in cases where products are low tech, older innovations, product differentiation is minimal. In some cases the differentiation between products may be so extreme that companies are forced to buy components from a direct competitor, just as Apple purchased roughly $8 billion worth of parts from Samsung last year (Levine 2013). Since newer, more recent technology is where the vast majority of profits are in the tech sector the level of difference of inputs is going to be considered high. This then increases the level of the bargaining power of suppliers put pressure on the company’s profit margin.  

Cost of Switching Suppliers
​Companies within the tech sector design their products around certain components, impacting size, shape, weight and function. If a company is to change their component supplier then the product will have to be reengineered, costing the company time and resources that could be allocated elsewhere. These then threatens the company’s ability to compete, stay relevant and develop newer products in a market with a high product turnover rate. Thus company’s have a high cost of switching suppliers, which in turn increases the bargaining power of suppliers which puts pressure on the buy’s margin and profitability.  

Threat of Forward Integration
​Forward integration, the ability of a supplier to enter a state of competition with their buyer ("Porter's Five Forces" 2012) is extremely high in the tech sector. For instance, MSI and ASUS, two long time component suppliers have both entered a state of direct competition with companies such as HP and Dell, who they still supply components for (“ASUS” 2012). Because component suppliers often have a majority of all of needed parts to make the final product they can easily enter the market, and while their products may not be on the cutting edge they are solid competitors. This threat of forward integration increases the bargaining power of suppliers, which decreases the profitability of the buyer.  

Supplier Concentration
​Supplier concentration refers to the strength of market share the top suppliers in the industry have in relation to the total industry ("Porter Model - Suppliers " 2010). Many of the larger tech companies have large market shares in their specific specialization, for instance Samsung has 97% of the world market share in OLEDs (Choi 2011), 40.4% in DRAM (Liu 2010), and 40.4% in NAND flash ("Samsung Expands" 2012). ASUS currently controls 40% of the world’s motherboard market ("ASUS" 2012), while Intel controls 82.3% of the global processor market (Shilov 2012). This extremely high supplier concentration results in a very large increase in supplier power, which drastically decreases buyer profitability.  

Summary
​The technology sector is rather brutal on buyers when it comes to their relationship with suppliers, who have a disproportionate amount of bargaining power with every category going in their favor. The difference in inputs, cost of switching suppliers, threat of forward integration and supplier concentration all favor an increase in supplier bargaining power and a decrease in buyer profitability. With all these factors considered it comes as no surprise that many companies make and develop their own components or are previous suppliers who have undergone forward integration.  

Power of Buyers
 
Criteria...
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