Wednesday, April 5, 2017

Porters’ Five Forces – Consulting Industry

When I was reading “The five competitive forces that shape strategy” by Michael E. Porter, I wanted to use the five forces for something that I am very passionate about. Hence, this is my analysis on Consulting industry using Porters’ Five Forces.

The five forces measure the competitiveness of the market deriving its attractiveness. The conclusions derived from the analysis are to determine the company’s risk from in its industry (current or potential). The five forces are a) Threat of New Entrants, b) Threat of Substitute Products or Services, c) Bargaining Power of Buyers, d) Bargaining Power of Suppliers, e) Rivalry Among Existing Competitors. 

a) Threat of New Entrants

The lower the barriers to market entry, easier it is for the new players to enter the market which may lead to increase in competition. Sources of barriers of entry are: 1) Supply-side economies of scale, 2) Demand-side benefits of scale, 3) Customer switching costs, 4) Capital requirements, 5) Incumbency advantages independent of size, 6) Unequal access to distribution channels, 7) Restrictive government policy.

In consulting industry, the threat of new entrants is medium-to-high due to low customer switching costs and low initial capital investment. But the success of consulting firms usually depends on the experienced and knowledgeable workforce as well as past success record.

b) Threat of Substitute Products or Services

A threat occurs when the demand for my product is affected by a change in the price of a substitute product. A close substitute limits significantly the ability to raise prices.

The threat of substitutes depends on the market we are targeting. For markets like information technology sector, the threat of substitute is high because of existing number of many firms and low switching costs. For markets like life-sciences especially agriculture, the threat of substitute might be relatively medium because there are not many consulting firms that specialize in life sciences.

c) Bargaining Power of Buyers

Buyers have power and control the market when there are only a few of them. There are many consulting companies in the US. Furthermore, the clients of consulting industry always have the option of in-housing experienced professionals from the market and hence have higher bargaining power.

d) Bargaining Power of Suppliers

Suppliers have more power when there are only a few of them. As there are many students graduate every year who target this industry, there is usually an intense competition between them. Hence bargaining power of suppliers is low.

e) Rivalry Among Existing Competitors

Markets with few competitors are attractive but can also be short-lived. On the other hand, some markets are highly competitive with many companies chasing the same consumers, which reduces market power.

Bigger consulting firms compete for the same Fortune 500 clients, smaller targeted consulting firms target businesses with clients in respective verticals lead to the high competitive rivalry between groups. Hence, rivalry among existing competitors is high.

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