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Porter's Five Force

By:   •  August 3, 2013  •  Essay  •  2,046 Words (9 Pages)  •  1,825 Views

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How useful would Porter's five forces model be as a framework for analysing the industry your company (or another you know well) operates in?

Porter's Five Forces model which is also called the "Industry and Competitive Analysis" offers an appropriate framework for discovering the financial factors that has an impact on the profitability and prices consumer pay in an industry. Porter's analysis methodically and systematically put on economic tools to analyse an industry in detail. (R.E. Marks, n. d.) Porter's Five Forces model is a vital tool for weighing the prospect for profitability within an industry. It is valuable as a way of assessing the equilibrium of supremacy in business situations.

Through a thorough assessment and identifying the strong points and course of each force, we can easily know the strengths of the company, trying to improve on weakness and the profitability of the company within the industry in the long run.

Analysing the usefulness of Porter's five forces model to the telecommunications industry in which MainOne Cable Company operates.

Main One Cable Company, the first privately owned submarine fiber optic cable company in the West Africa (Nigeria, Benin, Togo, Burkina Faso & Ghana for now) that provides open access, wholesale broadband and international connectivity to the rest of the continent and beyond. (MainOne, 2012). It started operations in June 2010 and it met an incumbent cable company in the form of SAT3 (jointed-owned by NITEL in a consortium). Nigeria is a country with population is approximately 140 million people and with a 69% telephone penetration rate as at February 2012 (Chuks, 2012) coupled with an internet penetration ratio of 26.5% as at May 2012. These figures provide information to show that there is great potential to invest in any technology that would earnest these vast opportunity in providing affordable and accessible broadband and internet access for the citizens of Nigeria.

Broadband would be a catalyst for social and economic advancement in this digital age with applications spanning National security, education, medicine, governance. It is the shared responsibilities of law makers, regulators to ensure the right policy framework are in place to accelerate a much higher internet and broadband penetration (Ndukwe, 2011). Ndukwe posit that with the economic future of Africa is very bright with the major submarine fiber-optic cable systems that are been installed, this increased bandwidth is going to force the broadband price to reduce significantly by a whopping 90 percent.

Digitalization, globalization and deregulation are drivers for the evolution of telecommunication industry in this digital era.

Herfindahl index (HI) measures the competitiveness of an industry. It measures the awareness of a product or service in an industry (Herfindahl, 2012).

Telecommunications companies have unique assets that do not have alternative use in other industries. This makes it a high barrier industry in terms of exit which inspires them to stay in the business even though when the things are not looking good.

The telecommunication industry has a very competitive and dynamic environment like any technology driven business. The key players are enormously large in terms of assets, product channel and brand awareness. There is no switching cost involved in moving from one provider to another, therefore the main inducement for gaining and keeping customers is by offering the lowest prices. Competition is aggressive and the providers' major efforts are dedicated on minimizing their cost so that they can offer their esteemed customers the lowest price in the market.

Porter's Five Forces (Porter, 1979) model is used as it provides a well-designed yet systematic outline to analyse the fundamental competitive and disrupting forces role within the environment of the telecom industry.

(Cleevely and Milner, 2011) Similar to majority of technology industry, the telecom industry is very dynamic which means that the kind and comparative power of the forces will be continually changing with time. Therefore, the analysis simultaneously looks at the environmental system as at today and also tries to forecast how they will change in the future.

The five forces are also referred to as the "near" environment i.e. the industry precise features. Surrounding them is the "far" environment i.e. the macro environment in which the industry operates.

Zooms into the competition that exists among the players in the telecommunications industry. It looks at the various factors that shape the competitive forces and hence factors like strength or multiplicity of competitors, attractiveness of market, how matured is the market, exit barriers etc are appraised.

1) The bargaining power of suppliers

The bargaining power of suppliers is weak in the industry. Suppliers in the form of Original equipment manufacturers likes Ericsson, Huawei, Alcatel and Nokia Siemens have partnered with the telecom operators to provide customized solutions in order to increase the volume of their sales. They have teamed up with operators to provide handsets that are SIM-locked to a particular network operator ensuring that customer stay on the operator's network using the particular handset. The Suppliers have also provided vendor financing so ease the burden of the operators in expanding their network. Some supplier go to the extent of providing its equipment free of charge such so as to swap out it competitor supplier and get a much bigger footprint in the operator's network. Supplier has now gone to provide Managed Services to operator by leveraging on their economy of scale to manage and support the numerous operators. The suppliers to choose from are small and therefore they don't have substitutes. Most of the jobs are not special that would require extraordinary skills and are readily available in the labour market for replacement or new hire.

2) The bargaining power of buyers

Because of the importance attached to internet and broadband access in the lives of the common man and businesses alike, there is little power in the hands of the buyers. Because there only few operators provide the kind of service they offer. They are at the mercy of the operators in determining how much they pay for the services because of the limited choices available. The number of buyers are large and therefore has little power to influence the prices of the services. As a result of the convergence of technologies within the industry, buyers are clamoring for bundled value added services.

In addition, in the telecom industry customers have a high degree of inertia because they would have gotten used to the services offered by the existing provider unless of course if the service is not good.

It is therefore a tall order as a new entrant to convince customers of your rival network to switch over to yours even though the switching cost is negligible or non-existence. The frightening issue is the ability to move from one provider to another at almost no cost and buyers are fully aware of the prices of the alternate providers.

3) The threat of potential new entrants

There is a high degree of loyalty in this industry. Customers are not ready and willing to change their number to move to another operator. Most new entrant might not be able to compete at the same price with the incumbents because it would be trying very hard to recoup the capital employed as quickly as possible. This becomes a serious barrier to potential entrants in trying to convince customers to switch to the network. However with the introduction of number portability, both new and existing players would be giving a level playing ground to compete. New entrant always find it hard to establish itself especially I it is new to the terrain. The business is highly capital intensive and most of the time involves joint ventures (consortium) or mergers and acquisition. This kind of arrangement has inherent problems during operations because of the number of stakeholders that are involved. The profit margin is sure to be eroded with the coming a new entrant.

New entrants find it very difficult to make their name especially so because they have no background and necessary experience in the area of business and have to deal with competing with established brands. Established companies normally would have standard and matured business process backed with advanced technologies tailor-made to their particular area of interest gained from years of existence. It is going to be extremely difficult for a new entrant to compete with this kind of company.

4) The threat of substitutes

With the number of cable companies already in the industry, new entrants would find it very difficult to make a strong showing in the market. Substitute has low impact in the telecommunication industry because of the many business opportunities that exist. Product differentiation is what providers are offering in the form

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