In 1979 Michael Porter described his 5 forces framework in Harvard Business Review that help us analyze the forces that shape and impact the strategic situation in any industry. This excellent article in HBR gives more details on his thought process. I have taken the below diagram from the same article and it does a good job of giving a overview of his framework in a short form.
Source: http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1
When I apply this framework to technology engineering industry then I see all these forces are already playing out and impacting the industry in a big way. If you, for a minute, consider your day to day experiences and observations then you will see that much of what I have written here is already happening. With due apologies to great management thinker Michael Porter I would like give my perspective on how these 5 forces are impacting technology development/engineering industry. When I say that I have in mind IT services industry, outsourced product development companies, MNC product R&D/Design centers in mind.
- Bargaining power of suppliers-
The suppliers of tools, licenses, third party IP stack/libraries, engineers & colleges that supply new talent to industry are all in this category. Except few examples I don’t think suppliers have much of bargaining power in this industry. Apple eco system and top colleges that offer good engineering talent are two exceptions I can think of.
- Threat of new entrants-
The threat of competition or entry of new vendor always exists. We either shape up or ship out. Already offshore vendors have taken large business from entrenched & complacent local giants. Recent economic times article says $25 billion worth contracts will be up for renewal in the next 5 years. And everyone is invited to the party.
- Bargaining power of Buyers-
This is real threat to all developers internal as well as external to product companies. Buyers have ever more options today in the era of craigslist, free wordpress themes and crowdsourcing. The free open source software gives ultimate bargaining power to all technology buyers today. Nothing can beat free software, especially if it is also reliable, easy to use and maintain. Globalization coupled with Internet is another driver that has given immense power to the buyers. Today you have a choice of employing global talent anywhere in the world. All this means that your buyer, internal or external, has today many options to obtain her software and switching cost to other team or product is practically zero.
- Threat of substitute product or services-
In its simplest form this can be buy Vs make decision. If it is available, cheaper, easier & quicker to buy and deploy then who would employ engineers to develop software from scratch? Another good example of substitute is SaaS and cloud combination which is threatening traditional business model of licensing the software for upfront cost and then installing on your desktop or server. Today you can pay per use instead. Another example would be open source. Today for many applications you can opt for a viable open source option instead of purchasing commercial software. If you design hardware for embedded products then your company or client may decide to buy white label product from Chinese or Taiwanese vendor and decide not to invest in designing the commoditized hardware from scratch.
- Rivalry among existing competitors-
I would consider both internal and external rivalry here. Rivalry need not be only external. Many a times the internal departments & teams are at odds with each other. Instead of joining hands as a single team they are often at loggerheads. The good example is difference of opinion & sometimes contemptuous relationship between sales team and development team within the organization. This weakens your position in today’s uber-competitive market and you may lose out to your external rival. External rivalry within industry is usually a race to the bottom if the only competitive edge involves ever decreasing prices and dislodging existing vendor by giving even lower price. Will technology services industry go airline industry way if such ‘every day lower price’ Wallmartization continues? For example, Indian IT industry is facing severe margin pressure because they have no pricing power whatsoever but their costs are rising. And adding zillions of campus recruits can help only so much before the clients bolt.
I would like to add sixth force to the list-
- The power Law- In today’s hosted & connected technology world the winner takes all. In every category the second player is distant second. In any case top 2 or 3 companies account for almost all market share. You need become No.1 or create a new category.
People involved in technology product development for long time are watching and are aware of these forces playing out in the last decade. Technology development trend seems to be towards – cheaper, faster, reliable, geographically distributed & locally focused development. So if you are a technology developer either as an employee or a service vendor, then you are in a market which is crowded with large number of companies and developers, many of whom are eager to work for pittance. You are in a market which is over flowing with free products developed by people who are happy to work for nothing. And increasingly if you are not first or second then you do not count.
Which competitive forces are impacting you or your company most at this moment? And most importantly which of these forces are likely to impact you most in the future as a technology professional… individual contributor or manager whatever in this decade?
Tags: Indian IT Industry, Porter's 5 Forces, Technology Engineering
