How Porter’s five forces work in the smartphone industry
The smartphone industry is marked by heavy competition. The leading brands in this industry with the highest market shares include Samsung, Apple, and Huawei. In recent years, the demand for smartphones has plateaued. Overall while adoption and use throughout the world have grown, smartphone demand fell in 2018 and 19 compared to previous years. To maintain their competitive position in the industry, smartphone companies are focusing heavily on research and development as well as marketing. There are several forces that affect the competitive position and success of smartphone companies. Porter’s five forces model is an analytical tool to analyze the competitive position of businesses and the profitability of a particular industry. These five forces are a part of every industry. They also play a critical role in the smartphone industry and affect the profitability of individual brands. Following is a five forces analysis of the smartphone industry.
Bargaining power of suppliers :
The bargaining power of suppliers in the smartphone industry is generally low except for the few large players like Google. Google is one of the largest suppliers in the smartphone industry. Most smartphones run on the Android operating system made by Google. Recently, the ban on Huawei related to the use of Android OS caused its sales to fall dismally. Otherwise, most of the suppliers are smaller players and most of them are located in Asian regions. Apple has its own operating system and so in its case, the bargaining power of suppliers is even limited. Some of the main factors that limit the bargaining power of suppliers in the smartphone industry include their smaller size and lower financial strength compared to smartphone makers. Leading smartphone brands like Apple, Samsung and Huawei are comparatively larger firms with enormous financial strength compared to the suppliers. It is why suppliers have to follow the quality standards set by the smartphone makers and their bargaining power remains limited. Moreover, most suppliers do not have the ability of forward integration which also leads to lower control.
Bargaining power of buyers :
The bargaining power of buyers in the smartphone industry has increased owing to several factors. One of the primary reasons behind the growing bargaining strength of the customers is the high number of substitutes in the industry. Increasing competition in the industry has added to the bargaining strength of customers worldwide. Moreover, customers are well informed and have several choices before them. While the number of smartphone models has grown in the market, they are now more affordable than some years earlier. Companies invest aggressively in marketing and customer retention. Apart from that, they also invest aggressively in research and development to make their smartphone models stand out from the competition. The focus on customers and customer experience is much higher than ever before. Overall the bargaining power of customers is moderate. Some of the factors that control the bargaining power of the customers include product quality, brand image, and prices. Products with higher quality are higher in demand. For example, smartphones with higher processing power and efficient cameras are higher in demand compared to other models.
Threat of substitutes :
The threat of substitutes in the smartphone industry mainly comes from rival brands and their products. There are several smartphone brands in the market. The top five brands with the largest market share include Samsung, Huawei, Apple, Xiaomi and Oppo. Except, Apple’s iPhone rest of the smartphones run on the Android OS. The number of models with large screen smartphones is very high. While Apple makes only premium models, its products compete with the premium offerings from Samsung and Huawei as well as Xiaomi. The threat of substitutes emerging from competing products also grows higher because differentiation has become difficult. Most models in a category come with similar features and nearly similar processing power. To overcome the threat from substitutes brands invest in marketing and product innovation. Achieving differentiation is difficult and so apart from technology, companies focus on their pricing strategies and customer experience. However, some factors that can moderate the threat from substitute products include product quality and brand image. The overall threat arising from substitute products is moderately high in the smartphone industry.
Threat of new entrants :
The threat of new entrants in the smartphone industry is moderate. The barriers to entry are not very high and generally, you do not need to invest very large capital to enter the market. However, the incumbent players aggressively invest in marketing and innovation to retain their market share and so winning a significant market share is very difficult for any new player. Moreover, companies have to deal with some major challenges to strengthen their competitive advantage in the industry. Apart from investing in technological innovation, which is essential for differentiation and market share, they also need to focus on marketing and customer experience. The legal framework in most countries also acts as a barrier to entry. Another important factor that deters new players is the level of demand which has plateaued in recent years. Stagnating demand also works as a barrier to entry for new brands since they will have trouble winning customers for new products. The number of substitutes is already high in the market since there are several models in each segment. Other factors that moderate the threat from new players include the brand image of existing players, their focus upon research and innovation and high standards of product quality. All these factors together limit the threat that arises from the entry of new players in the market. However, large players with a strong image and sufficient investment can still enter. Google entered the market with its Pixel smartphone. While it is still not a leading player in the industry, still the market share of Pixel in the US market has increased over time.
Intensity of rivalry in the industry : –
The intensity of rivalry in the smartphone industry is very high. Demand has plateaued in recent years, leading to an increased focus on innovation and customer retention. Companies are investing aggressively in R&D to maintain their market shares. The leading companies are also among leading spenders on research and development. Samsung is one of the top spenders on research and development. Apple has also grown its investment into R&D during recent years. Moreover, while Samsung and Huawei have managed competitive pricing strategies, Apple which is known for its premium prices also priced the base model of iPhone 11 competitively in order to maintain demand. The result was heavy sales. Xiaomi and Oppo have also maintained competitive prices to retain their market share. Apart from the top five, there are other brands also competing for market share. LG and Vivo have also maintained impressive market shares. Competition has grown stronger because of the low scope for differentiation and demand having grown stagnant in recent years.