PORTER’S FIVE FORCES ON THE IT INDUSTRY
• Threat of new entrants: LOW to MEDIUM: Competition is intense and with a surplus of talented engineers, anyone can enter the industry with a few computers, an office space and an internet connection. It doesn’t involve high fixed cost but the price competition between companies is high and not much of a profit margin (industry 5 yr average - 17%). As there are several established and highly experienced companies, it will be difficult for a new entrant to win projects and maintain a good profit margin too. But as the cost to enter the industry is minimal, I would say the threat of new entrants in medium. Entry Barriers: LOW: 1.Companies is well established and offer almost similar services (little product differentiation). 2. Low capital requirements 3.As the switching cost is low for clients, IT service companies usually expect a contract for a year or more, so clients may not be able to switch easily, making it difficult for new entrants. 4. Economies of scale – is not essential in this industry. The marginal cost for a new client is relatively low and hence it’s not necessary to have economies of scale to survive in this industry.
• Rivalry among established firms: HIGH: TCS, Infosys, Wipro, Memphis and many more such companies are well established and offer almost similar services. Competition is intense due to little product differentiation and it doesn’t involve high fixed cost. As the price competition between companies is high, companies are forced to look at new ways of reducing costs.
• Bargaining power of buyers: HIGH: IT industry is largely driven by its customers and the clients are usually large and Fortune 500 companies. As there are several companies offering similar services, clients can play one IT company against another, drive down prices, insist on quick delivery and force maintenance of software to be a low-cost or no-cost deal. Buyers can possibly integrate backwards but it may involve higher cost for them and hence they outsource