PORTERS Five Forces Model
Porter's five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter . It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. The five forces defined by the model are:
1. Supplier bargaining power
At first glance, it might look like telecom equipment suppliers have considerable bargaining power over telecom operators. Indeed, without high-tech broadband switching equipment, fiber-optic cables, mobile handsets and billing software, telecom operators would not be able to do the job of transmitting voice and data from place to place. But there are actually a number of large equipment makers around. There are enough vendors, arguably, to dilute bargaining power. The companys policies regarding its suppliers give greater control and power with respect to pricing and payments.
2. Customer Bargaining Power
With increased choice of telecom products and services, the bargaining power of buyers is rising. It is the perception that telephone and data services do not vary much and is regardless of which companies are selling them. For the most part, basic services are treated as a commodity. This translates into customers seeking low prices from companies that offer reliable service. There is lack of differentiation among service providers and uniqueness of services and brand differentiation is difficult. Mobile number portability would allow change of mobile operators increasing the power of customers and have a negative impact. Also, there are a large number of players in the market and customers switching cost is low. At the same time, buyer power can vary somewhat between market segments. While switching costs are relatively low for residential telecom customers, they can get higher for larger business customers, especially those that rely more on customized products and services.
3. Threat of Substitutes
Products and services from non-traditional telecom industries pose serious substitution threats. It is evident that the share of substitutes like the landline and CDMA operators is diminishing. However, cable TV and satellite operators now compete for buyers. The cable TV operators, with their own direct lines into homes, offer broadband internet services, and satellite links can substitute for high-speed business networking needs. Railways and energy utility companies are laying miles of high-capacity telecom network alongside their own track and pipeline assets. Just as worrying for telecom operators is the internet: it is becoming a viable vehicle for cut-rate voice calls. Delivered by ISPs - not telecom operators - "internet telephony" could take a big bite out of telecom companies' core voice revenues. Also services like video conferencing, Voice over IP (VOIP) like Skype, Yahoo Messenger, etc. and e-mails and social networking sites are emerging cheaper substitutes for the mobile telecom operators. Thus, the threat of substitutes is quite high for an emerging telecom sector company like ours.
4. Threat of new entrants
It comes as no surprise that in the capital-intensive telecom industry the biggest barrier to entry is access to finance. To cover high fixed costs, serious contenders typically require a lot of cash. When capital markets are generous, the threat of competitive entrants escalates. When financing opportunities are less readily available, the pace of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entry as high license fees is to be paid upfront and there is high gestation period. Also, spectrum availability and telecom sector regulations pose a problem. The telecom sector is characterized by rapid change in technology and customers swiftly changing their preferences as switching cost are low. Recently, it is also observed that there is entry of Mobile Virtual Network Operators (MVNO) and Wimax operators that acts as a deterrent for new companies. In addition, it is important to remember that solid operating skills and management experience is fairly scarce, making entry even more difficult. Though, it would not be wrong to say that there is relatively low threat of new entrants but it is worthy to note that huge investors are ready to enter the market considering the industry attractiveness. Also the recent policy of allowing 76% FDI allows competition from foreign players.
5. Competitor Rivalry
Competition is "cut throat". The wave of industry deregulation together with the receptive capital markets of the late 1990s paved the way for a rush of new entrants. New technology is
prompting a raft of substitute services. Nearly everybody already pays for phone services, so all competitors now must lure customers with lower prices and more exciting services. This tends to drive industry profitability down. In addition to low profits, the telecom industry suffers from high exit barriers, mainly due to its specialized equipment. Networks and billing systems cannot really be used for much else, and their swift obsolescence makes liquidation pretty difficult.
