Overview of the Industry:
The Industry analysis diversified computer system industry comprises of a few big market players namely; IBM, HPQ, Cray, Pinnacle Data Systems, Silicon Graphics, and Teradata Corporation. However, the industry indirectly competes with specialized companies (Dell, Acer, Apple, ASUSTeK, Accenture Sony Corporation, Infosys, Wipro, SAP, Oracle, Microsoft etc.) in the product and service ranges of personal computers and laptops, printing & imaging, data services, enterprise resource planning etc (Yahoo Finance). Furthermore, the overall industry still mostly relies on global PC industry which is expected to grow a compound growth rate of 3.8 % during 2011, while laptops would be the major contributor to its growth (Gartner). The industry dynamic is also rapidly changing due to consolidation which is leading to the emergence of some bigger competitors in the industry. Moreover, the changes in global demand and new technologies are rapidly changing the outlook of the overall industry where competition based on price war is becoming aggressive.
Porter’ Five Forces Model and Diversified Computer System Industry:
Competitive Rivalry:
The diversified computer industry presents intense and fierce competition, as it is comprised of some long-established corporations and a large number of new and rapidly growing firms (Porter). The industry landscape is also increasingly taking new shape due to industry consolidation
creating larger, more homogeneous and aggressive competitors in the market. Moreover, some existing players are also entering into exclusive arrangements with other existing or potential customer or suppliers. Moreover, the firms are under huge pressures to bring innovation in their products and services due to short product life cycles and to remain competitive on the basis of technology, performance, price, quality, reliability,
brand, reputation and range of products and services. Moreover, price war seems to be aggressive as the industry matures and this pricing pressure is leading to reducing development cost through more consolidation (HP Annual Report).
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Potential Threat of New Entrants:
There are huge threats of new entrants in the industry resulting in reducing the existing margins and profitability of the competitors. The healthy growth prospectus of PC and related industry has attracted companies to diversify into the computer industry. Many global conglomerates have plunged and are planning to plunge into data services, technologies, and enterprise resources planning. However, it is still difficult for smaller IT firms to enter into the hardware market and PC market due to complex, costly process of developing new high technology products and services.
Bargaining Power of Buyers:
customers comprising of individuals, small business firms and medium corporations have large bargaining power over manufacturers and services providers. In addition, this bargaining power is reflected in buying preferences and dictating demand. Moreover, the buyer’s are increasingly looking for cheaper and quality oriented products and solutions, which has to lead to companies to introduce Notebooks and Touchpads (2011 Pivotal for PC Industry).
Bargaining Power of Suppliers:
Due to the commoditization of hardware components of PCs, Notebooks, and Laptops etc. a limited number of OEMs have huge bargaining power over market players. Such as in personal computing, Intel and AMD are the major microprocessors they have permanent agreements with market players. In addition, system software provider, Microsoft stills dominate with its Windows Operating system and exert huge pressures over manufacturers.
A threat of Substitutes:
Shorter life cycles, maturing industry, aggressive pricing, complex process of developing innovative products, strict laws regarding patent infringement and safety and reducing profit margins create the barrier for substitutes in the industry. However, market leaders in the industry with greater talent and R& D can easily come with a cost-effective, innovative solution in the market as PC’s Notebooks market share is being captured by small tech-pads and handheld devices (iPad, Galaxy Tab, iPAQ etc.) (HP Annual Report)
Industry Financials:
The industry financials present a bleak situation where companies have an average operating margin of 5.95 percent in the year 2011, whereas the average Price/ Earnings ratio amounts to 16.69. The average dividend yield is 1.21 percent with the price to book ratio of 4.29 and price to sales ratio of 1.72 (Monycentral). please see appendix for detailed analysis.
Future Outlook:
The world most valuable resource in the 21st century is information. Information once used as a tool for overall organizational productivity has now become a tool for communication and collaboration. Thus major players can harness the information-based society by providing innovative solutions and products. The IT spending forecast by Gartner Inc. also reflects healthy prospectus for the overall diversified computer system industry. It has forecasted that global IT spending would grow by 7.6% in 2011, while the spending in computer HW sector is expected to grow by 9.2 percent and IT services by 7.4 percent in 2011. Moreover, the companies with huge general purpose computing product line may get the huge competitive edge by harnessing the forecasted growth of notebooks which are expected to take a 30% market share of the global laptop industry by 2012. Moreover, developing countries are expected to see the faster growth rate in the laptop and PC industry. However, global economic factors and changing buyer preference for faster, more reliable, efficient technological solutions may influence the IT spending by small and large corporations and thus affecting the overall demand for computer hardware, enterprise resource planning, and data services.