1Sharyl Lau
Business Analysis & Valuation
Case Study 2: Inventec Corporation
Michael Porter’s 5 forces in ODM
1. Rivalry:
There is a large no. of competitors
Low switching cost
Industry is growing (20%)
High fixed to variable cost
Low excess capacity
Therefore, competition between existing companies is high
2. New entrants (Entry barriers):
First mover advantage; small market share left
High cost involved for machinery and R&D
Patents on existing competitors
Medium entry barriers
3. Bargaining power of buyers
There are few buyers (OEM – Dell, HP, Apple)
High bargaining power
4. Bargaining power of suppliers
(suppliers – software, chips, capital)
Suppliers have a monopoly
High bargaining power
5. Substitutes
Not many substitutes available at that time (2004)
Low threat of substitute products
Michael Porter’s 5 forces in India’s software industry
1. Rivalry
High demand
Comprises of a few large players but many small players
Companies sell specialized software reduce competition
High switching cost; need to learn how to use the new software
Low fixed to variable cost
Low exit barrier
Low rivalry among existing companies
2. Entry barriers
Reputation of existing companies limit new entrants
Many engineers available to make new software
Medium entry barrier
3. Bargaining power of buyers
High switching cost
Low bargaining power
4. Bargaining power of suppliers
(suppliers are the labour)
Labours do not have strong bargaining power
Low bargaining power
5. Substitutes
Not many substitute products for software
Low threat of substitutes

Therefore, competition is more favourable in software industry, hence they can charge high price for their products and offer low wages for labour, hence they have a higher profit margin.
1. Despite its growth and size, why is Inventec not very profitable?
Profit margin = 1.2%
Inventec is a small company, hence they cannot spread out their overhead costs etc.
One of Inventec’s customers have low profit margin
Inventec has limited clients: Compaq and HP merge into 1 only have 1 client, hence Inventec becomes at the mercy of its client; bargaining power