Porter’s Five Forces is a strategic analysis tool that is most acclaimed among managers making strategic decisions. It determines industry structure and its profitability level. According to M. Porter, the nature of competition, the attractiveness of an industry and the level of competitive intensity in any industry can be determined by doing 5 forces analysis:
- Threat of new potential entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Rivalry among current competition
- Threat of substitutes
Importance of Porter’s Five Forces Model
The 5 forces Model mentioned above is very important from the point of view of strategy formulation. These 5 forces jointly control the profitability of the industry because they govern the prices which can be charged, the costs that can be borne, and investment required to compete. The potential of these Porter’s Five Forces varies from industry to industry. The managers should use Porter’s Five Forces framework to determine the competitive structure of the industry before making strategic decisions.
Let’s understand Porter’s Five Forces analysis of Qualcomm Inc. in detail:
Threats of New Potential Entrants
New Potential Entrants refer to the firms which are not currently competing in the industry but have the potential to do. Entry of new competition increases the industry capacity, starts a competition for market share and lowers the current pricing. They bring innovation, new ways of doing things and put pressure on Qualcomm through lower pricing strategy, reducing costs, and providing new value propositions to the customers. The threat of new entrant by potential competitors is a function of the extent of barriers to entry.
The different barriers to entry for Qualcomm’s potential competitors are-
- Very High Initial costs and significant R&D investments.
- Human resource is very expensive i.e. engineers, developers, designers etc.
- In the USA, IP (intellectual property) protection available to prevent infringement which also increases barriers to entry.
- EDA tools, market & contract costs very high
- Product differentiation with new designs very important
- Continous change in Technology 180nm, 130nm, 110nm, ……., 28nm, 22nm, 16nm, 14nm, 10nm, 7nm, 5nm. It is progressing at a rapid pace and hence the risk of obsolescence very high.
How can Managers confront the Threats of New Potential Entrants?
- By continuous product innovation and driving excellence in services.
- Increasing brand loyalty and providing absolute Cost Advantage.
- By increasing Customer Switching Costs.
- Building economies of scale so that fixed cost per unit is reduced.
- Building capacities and spending money on research and development. New entrants avoids dynamic industry where the established players define the standards frequently.
Bargaining power of suppliers
Almost every company in any industry has multiple suppliers which provide them inputs(services, labour or raw materials). Therefore Suppliers are the firms which provide inputs to the industry. Bargaining power of the suppliers refers to the potential of the suppliers to increase the prices of the inputs or the costs of industry in other ways.
For example, as a fabless semiconductor company, Qualcomm works closely with the semiconductor foundry TSMC and assembly suppliers that manufacture their products. If TSMC increases the cost per unit for manufacturing the chip. One Good example could be If Mentor Graphics (Seimens) increases the price of their EDA tools licensed by Qualcomm to design their products. Another example could be Arm(SoftBank holding) can increase the price of Processor cores which are being used by Qualcomm’s Snapdragon Processor. This will lead to lesser margins which in turn lower the profitability.
How can managers confront Bargaining Power of the Suppliers?
- By building efficient supply chain with multiple suppliers.
- By experimenting with product designs using different materials so that if the prices go up of one supplier then the company can shift to another.
- Try lowering the cost of switching beforehand.
- Increasing the strength of distribution channel.
- By developing dedicated suppliers, like Apple developed Imagination technology whose business depends upon the firm.
Bargaining power of buyers
Buyers refer to the firms who purchase Qualcomm products in high volume and then distribute it’s product to the final consumers. Strong buyers such as firms including Samsung, Apple, LG, etc can extract profits out of an industry by lowering the prices. They purchase products in very high volumes. Generally, they have full information about the product and the market. Buyers are price sensitive and they pose a credible threat of backward integration. For example, Samsung has started to develop it’s own Exynos Processor for their mobiles where earlier it used to depend upon Qualcomm or Mediatech Processors.
How can managers confront Bargaining Power of the Buyers?
- Quick development of new products will reduce the threat of backward integration.
- By increasing your customer base. It will help decrease fixed cost per unit by building economies of scale.
- By swiftly innovating new products, it can limit the bargaining power of buyers.
- By Keeping Switching costs of the Buyer to other suppliers very High.
Rivalry among current competition
Qualcomm’s major competitors include Mediatech, Broadcom, Samsung, Texas Instruments, Intel, AMD, Nvidia, etc. They compete on product differentiation like chip performance(Speed, Graphics), power, etc. This force in Porter’s Five Forces is the major determinant of how much intense competition and returns on investments are there in the Industry. For example, Only a few companies Mediatech, HiSilicon, Qualcomm compete aggressively for a Mobile device processors market share, which results in the less competitive market and in turn higher profits. however, if we take the example of a Bluetooth product then there are multiple competitors fighting for market share which in turn lowering the profits.
How can managers confront Competition?
- Moderate the number of competitors.
- By Keeping customers loyal to their brand.
- By managing the threat of being acquired by a competitor
- Keep constant check on Industry growth rate and size
- Create blue Ocean for their Products.
- Product differentiation
Threat of substitutes
How can managers confront the threat of substitutes?
- By finding the number of substitutes available.
- By tackling the performance of substitutes
- Understanding the customer need very well.
- By determining the cost of changing