Porters 5 Forces Essay

Five Forces analysis for IT industry Wipro Technologies is a global information technology (IT) services company. It provides custom application design and development, IT consulting, systems integration, technology infrastructure out sourcing, software products and BPO services. Michael Porter’s Five Forces Model looks at five key areas- the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. Threat of new entrants: New entrant in the market may have an effect on share of older counterparts Threat of substitute: Due to technological advances, Quality constraints or cost effectiveness there can be a threat of the substitute on the industry. Bargaining Power of customer: This is the bargaining power of the customer -one who is consumer of the goods. Bargaining Power of suppliers: This is the bargaining power of the supplier -one who supplies sources that are needed for finished goods. Comparative Rivalry within Industry: It tells about extent of competition in between firms in an industry. Porters Five Forces helps to analyse how these forces act together to cause the company to increase or decrease profitability of the company. The strategy of the company should be to influence these forces to maximise profitability. Hence below is a study of the IT industry and study of profitability in custom application design development, systems integration, technology infrastructure management segments of IT Threats and barriers to entry Economies of scale and Capital Investment Requirements: IT requires very low investment and hence we have hundreds of startups starting every year. While it is easy to invest and start a software company sustaining growth does not come easy. All these start-ups also play in an area where Wipro does not compete like low value projects or in subcontracted work. Hence they are not a threat to the profitability of Wipro. India is the favourite destination for off shoring Information Technology (IT) and IT enabled Services. The Indian IT/ITES industry commands more than 50% of global ITES off shoring market share. The IT/ITES exports are set to cross USD 60 billion by 2010 and Nasscom (The National Association for Software and Services Companies), estimates that the industry will account for USD 63. 7 billion of revenues and direct employment is expected to reach nearly 2. 3 million. The IT industry contributes around 26 per cent of India’s total exports and was around 6. 1 percent of India’s GDP for financial year 2009-2010 (NASSCOM, 2010). 2 Customer switching costs Wipro works across verticals like telecom, BFSI, Media and Communication, Automobiles, Government, Technology, Manufacturing, Energy, Healthcare, Hospitality etc and has several ODC or offshore development centres for nearly all top companies in the world. These offshore development centres have thousands of resources working with multi year projects earning millions of dollars of revenue a year. The cost of shifting or switching even a part of these projects to other companies would involve huge set up, transitioning costs with no guaranteed results. Wipro has quality certifications like Cmmi Level 5, PCMM Level 5,BS9977 etc and new entrants will face a barrier in this regard. Global contracts will not be given to companies with the lack of certification. The lack of security certifications will cause customers to have security related concerns while sending data offshore. 3 Access to distribution channels and technology This poses no difficulty. Many top business unit heads have previously quit from Wipro and spawned off their own company which has grown and sometimes taken a part of the market share of Wipro. Since the industry thrives on knowledge workers when a senior person leave he takes access and knowledge of customer base and customer contacts with him. The Internet is present everywhere and software technology in the era of open source is easily accessible to all. 4 Government Subsidies and policies Current favourable policy by government for new ITES-BPO firms is creating competitive situation for Wipro and other established players in the India IT industry. The reforms have reduced licensing requirements and made foreign technology accessible. The reforms have also removed restrictions on investment and made the process of investment easier. This has tremendously helped the IT industries. The Indian government is actively promoting FDI and investments from NRIs (Non-Resident Indians). FDI can be brought in through the automatic route, based on powers accorded to the Reserve Bank of India. Improvement and reach of telecommunication can aid new entrants into the IT industry. Similary improvements in infrastructure and power sector can also aid new entrants into the IT industry. Recognizing the importance of Venture Capital Funding, the Ministry of Information Technology has set up a National Venture Fund for the Software and IT Industry with a corpus of Rs. 100 crore. The main aim of the venture capital Fund is to provide Venture Capital to start up software professionals and small IT units. Nasscom (most important promoter of the IT/BPO industry) has been playing a crucial role in helping the IT industry achieve the IT and ITES vision and make India far ahead of other players in the field of IT and BPO. But new entrants and start ups can never be in the league of Wipro which adds 20-30 new customers every quarter and earns revenue in the range 0f 50-60 billon USD every quarter. 5 Brand Loyalty Since Wipro is in multi year relationships with most of it’s customers and since the relationship is driven top down from CEO level and exists sometimes with entire IT organisation of the customer, there is a deep brand loyalty that cannot be forsaken. Wipro trades on NYSE and is a well respected global company. Threat of Substitute Price is most often the main differentiator among key players in the software industry quality of service being the same. Indian IT firms like Wipro face stiff competitions from their counterpart in other emerging market like Russia, Brazil, Mexico, Philippines and China. The IT providers in these markets charge competitive rates as compared to Wipro. But Wipro has development centres in China , Philippines so that they can leverage the same advantage. At the same time Wipro attracts a huge pool of resources from the many leading technical institutions across India . These resources are trained to work in many technologies and also are very flexible with respect to work timings. Additionally, the Wipro has been exceptionally quality focused being the first Indian Cmmi Level 5 company with high-skilled pool of knowledge workers with English speaking Hence it has an upper edge over other offshore locations like China, Philippines or Latin American countries 1 Quality/Value proposition While start-ups work like a flash in the pan and sometimes do attract a first time IT outsourcer it is MNCs like IBM and Cognizant which can be identified as substitutes for Wipro. Cognizant with it’s steady and continued growth rate has taken a part of the market share of companies like Wipro. An MNC with a formidable history and background can e work as substitute for Wipro in the software industry due to the differentiation that they bring in terms of delivery models, senior people/leadership in the organisation, R;D focus, steady focus on not yet mature verticals (like healthcare in Cognizant’s case for example) and pumping back money into the business. These MNC bring a better value to the customer and engage the customer at a more strategic level . Buyer’s willingness and relative price/performance of substitute As per a report in Economic Times Emerging near shore rivals, including Ness Technologies of Israel, CPM Braxis of Brazil and Mexico-headquartered Softtek are increasingly becoming attractive for top outsourcing customers such as GE, Citibank and several others seeking to work with local, specialised vendors instead of sending all projects to offshore locations like India. Though Wipro is growing it’s presence in the emerging markets of Latin America, Eastern Europe and Asia, they face stiff competition from these newer rivals. For many customers who already have significant presence in offshore locations like India, it’s a risk diversification, Some customers having 70-80 per cent of their offshore resources in India are realising that they need to look at the third category of suppliers that are local and niche. Over the past two years, companies such as CPM Braxis, EPAM Systems, Ness Technologies, Softtek, Merchants and Spi Global have emerged as stronger rivals for Indian tech firms, especially while bidding for an outsourcing contract being fleshed out by a ‘first-time outsourcer’. Brazilian firm CPM Braxis, for instance, which counts GE, ABN Amro and Whirlpool as clients, reported revenues of around $567 million in 2008. One of the top four Brazilian banks, Bradesco, is also among the biggest customers for the company. While these emerging outsourcing rivals are not yet in the big league of mega, multi-year contracts, they are still able to gain business because of their niche and local market expertise. On an average, these companies are able to win contracts worth $2-5 million in annual contract value. Bargaining power of customer Concentration of buyers and sellers There are a large numbers of playes in the software industry. While India and Indian software companies with demonstrated performance are the lead runners, players across the world and especially from other developing countries like Brazil etc are in the run. Hence the customer has huge bargaining power. 2 Profitability of buyer OF late due to the cut in IT spending, while IT spend of the custome rs may have reduced, the number of players are vying for the same budget. Hence cost advantages become very major and customer drives the billing rates. This is because most of the projects are in maintenance or integration and quality differentiation may not be there among number of players. 3 Switching Costs But for existing projects where switching costs are high , new higher billing rates have been worked on on contract renewal even in the recession period. Also with a tighter monitoring of IT spend of customers and in an effort to distribute the risks customers also rarely give an entire project to one customer often distributing the project to all key players hence igniting rivalry and competition. Forward Integration Many captive companies have leveraged the same advantage as companies like Wipro of resource availability at low costs and have opened their captive centres in India, which acts as an IT wing of their company and develops software for them. Examples are many like Shell , JP Morgan, man international banks, Bosch, Boeing etc. Bargaining power of supplier 1 Concentration of suppliers and demand Since there are a lar ge number of technical institutions campus recruitments bring in thousands of entry level people at low salaries. But at the same time attrition is very high in the software field since with experience resources may move to greener pastures. 2 Profitability of suppliers There is a huge demand for experienced professionals in key skill areas. Companies need to continually invest in resource development and training in upcoming technologies and keep them from leaving the company by attractive remunerations, trips abroad etc. Since many of the suppliers who support the IT service industry -are local and IT industry earning capitalize on the rupee dollar difference . The suppliers are happy to be in engagement with the IT company and are happy with what they are offered though it is a miniscule of what the IT company earns. Example are cab companies. Rivalry or Competition 1 Structure of competition The key players in the IT industry are in intense competition with each other. All the major players like TCS, Infosys etc have the same kind of delivery models, verticals focus, billing rates and also almost the same customer base, geographical presence etc. So most of the competition is around excelling in domain knowledge, gaining thought leadership in technology areas and building customer relationships. But the large players are only a few in number who are clear market leaders. Still Startups concentrate on niche technologies and domains and beat inroads into the IT companies market share. Start-ups thrive on a hire and fire policy where the resources are taken on at the beginning of a project at high salaries and fired after it’s completion. Since there is no service differentiation the customer believes in divide and rule policy where the each key player is given a near equal piece of the pie, pitching one player against the other and igniting intense rivalry. The key to getting good projects is good experienced resources, number of people with a specific skill etc. Hence resource poaching is a common phenomenon. 2 Cost structure of the Industry Companies like Wipro have high overheads owing to it’s size and complex organisation structure. New companies with none of the legacy of Wipro, can come in with niche focus and take a portion of maket share related to R;D, innovation where creativity, technicall prowess is more key than standard processes, certifications etc. So time and again projects are lost to smaller companies who are more nimble and lean and once that happens it can plot the growth story of a new rival in that specific domain for Wipro. Wipro thrives majorly on large offshore multi-year dollar contracts in application maintenance, infrastructure management where skills are not high end. The requirement is to maintain large bench strength to quickly source these projects. This adds to the cost of most key players in the Indian IT scene. 3 Strategic Objectives For the past 5 years Wipro and other key players have had relatively lesser focus on moving up the value chain. All key players are still milking the standard IT services industry demand for maintenance, testing, infra management contracts with global companies in an primarly offshore model. Growth strategies are mainly to expand to newer geographies access the same standard IT services demand. Growth of all key players have been demand driven and more or less uniform. There have been few acquisitions but no aggressive growth stories amongst competing players. It can be concluded that Wipro is a key player in the IT industry and carries on with it’s brand name, sheer size and momentum as also it’s leadership and service quality. But to up the ante key differentiations have to be brought in – which needs to be paradigm shift in the way business is done. Whether the innovation is thru new technologies like cloud computing or whether it is through the review of business models to emerge as a product and/or consulting company where it engages with the customer strategically – change is to be brought in. Else the MNCS like Cognizant, near shore companies like Ness etc may soon catch up or take a part of the pie.