Industry Parameters IT Services
IT Services thrive by providing Low cost
Demand:
Why would there be a continued proposition for same services
demand for the product / service Labour / skill shortage in long run
Educated manpower at reasonable
cost
Key supply drivers
Continuous skill enhancement of
employees
High degree of change – due to
Degree / nature of change
technology changes / high competition
Predictability is low due fast
technology changes.
Predictability of business Clock speed for the Business is high.
Changes in the environment every 2-3
years
Not yet as the model is moving to
Cyclicality?
offshore
Very moderate.
Ability to increase price ahead of More demand supply gap driven.
inflation (Pricing power)
Commoditization at lower end and
moving up the value chain
None at all – close to perfect
Some sort of monoploy or Oligopoly
competition.
Does the company have a recurring
Yes
revenue stream
Weak to moderate brand.
Does the business have franchise /
No franchise.
brands or is it commodity
Lock in due to Switching costs
High growth currently due model
Does the industry enjoy high growth
shifts. Looks likely for the next few
rates ? For how long
years
Porters Five Force Model to Industry Analysis
This model is the best in ascertaining the competitive scenario of the industry and it’s being used extensively by businesses all over the world.
There’re five forces that are taken into consideration for industry analysis
Threat of new entrant: It’s important for a business and industry to know the factors responsible for new businesses to come in the
industry. Economies of scales, time and cost of entering the industry, technologies, barriers to entry etc. need to be taken into account.
Buyer power: To understand the buyer power, the businesses need to know the numbers of customers prevalent in the market, price
sensitivity, ability to substitute, cost of changing etc.
Threat of substitution: It’s important to know that whether there’s any substitute for the products/services available in the market or
not.
Supplier power: This is a simple analysis of suppliers and uniqueness of their supplies.
Competitive Rivalry: These are competitors’ analyses. The factors that need to be understood are number of competitors, differences in
quality, customer loyalty, switching costs etc.
Recent Trends and developments:
Understanding the components of the industry:
Porter’s 5 forces on IT Sector
Porter’s 5 forces for industry
IT Services
attractiveness
Extremely attractive returns
due to high demand and high
value add for the customer.
Industry attractiveness summary and Entry barrier have now
reasons for low high returns become high as the larger
firms have become big.
Rivalry is not destructive due
to high growth.
Buyer power is not very high
and supplier power /
Substitute does not impact.
Very returns in the industry
currently as it is a sunrise
industry
Barriers due to economies at
low end work
Barriers due to vertical based
ENTRY BARRIER – No. 1 Factor deciding
competency
industry profitability
Companies can enter although
the industry is now
consolidating
Asset specificity Low
Economies important at low
Economies of Scale end – especially for
outsourcing
None – IPR / knowledge base
Proprietary Product difference for vertical is the only
differentiator
Brand Identity Specific for verticals
Switching cost High
Capital Requirement Low
Distribution strength NA
Cost Advantage High – but applicable to all
Government Policy NA
Expected Retaliation High
Production scale NA
Anticipated payoff for new entrant High
Pre-commitment contracts High
Learning curve barriers High
Network effect advantages of
None
incumbents
No. of competitors – Monopoly /
oligopoly or intense competition Intense competition
(concentration ratio )
Medium rivalry. However,
firms in the industry due to low
exit barriers do not engage in
RIVALRY DETERMINANT destructive competition.
Expected to increase with
growth
Industry growth High
Fixed cost / value added Low
Intermittent overcapacity Low
Product difference Low
Informational complexity Medium to Low
Exit Barrier Low
Demand variability Low
SUPPLIER POWER None – Input is manpower
Differentiation of input None
Switching cost of supplier None
Presence of substitute None
Supplier Concentration None
Imp of volume to supplier None
Cost relative to total purchase None
Threat of forward v/s Backward
None
integration
% Sales contributed by Top 5
BUYER POWER account. High for smaller
companies
Varies for companies. Tier II
Buyer conc. v/s firm concentration companies have higher Buyer
conc
Buyer volume High for Tier II companies
Buyer switching cost High for buyers
Buyer information High
Ability to integrate backward Low. The reverse is happening
Substitution is feasible with
another vendor. However,
Substitute product
switching costs are high. Hence
repeat business is key variable
Price sensitivity High for low end work
Price / Total Purchase High
Product difference Low
Switching cost Medium
Buyer propensity to Substitute High
Customer relationships
important
Knowledge management
important.
Intangible assets Branding important more from
recruitment point of view.
Branding becoming critical for
the top vendors
Research for creating IP for
high end is gaining importance
