The smartphone industry in 2012 has moderate to high profit potential. Analysis of the industry using Porter’s Five Forces Model of Industry Competitive Structure reveals that most of the forces are relatively weak. The incumbent firms in the smartphone industry include Research in Motion (RIM), Google, Apple, Samsung, and Nokia. These companies use several different strategies to capture market share in the smartphone industry that will be examined along with the forces that affect the competitive structure in this industry.
First, the threat of new entrants in the smartphone industry is overall high. Although there are incumbent firms selling phones on the high-end, there’s still a market for those who can only afford less. Thus, a new firm wouldn’t necessarily have to manufacture complex smartphones for a high price to enter the industry. Also, the minimum efficient scale to compete is low, meaning that there are low costs needed to start producing smartphones. New firms buy and/or assemble hardware overseas, which eliminates the cost of producing exclusive hardware.
Also, firms can acquire software at little to no costs due to open-source and licensable operating systems (i.e. Android OS), eliminating the cost of developing own software. However, customer switching costs may play a role, mainly in the time and effort needed to learn a new operating system. The switch might take more time for some or no time at all for others. Overall, these factors show low barriers to entry, making it easier for new firms to enter the market and gain some market share.
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Second, the power of suppliers is weak to moderate in the smartphone industry. Suppliers depend somewhat heavily on the industry to sell their hardware. Even though their products are undifferentiated and can also be used in other products, like tablets and computers, those markets aren’t as big and profitable as the smartphone industry. Many consumers buy a smartphone to substitute a tablet or laptop due to its convenience and additional yet critical uses (i.e., making a phone call).
Also, forward-integration is not likely since suppliers won’t necessarily try to produce their own smartphone due to the increase in costs. The suppliers would have to produce and organize other necessary hardware to manufacture a smartphone as well as spend time and money on research and development to develop a smartphone and a matching operating system, if not using the free Android OS introduced by Google.
Third, the power of buyers is relatively weak in the industry as well. There are many buyers compared to sellers, and each buyer usually only needs one smartphone for himself/herself or a few for family members. Since there are many buyers purchasing small quantities, consumers don’t hold any power over the firms’ prices for the smartphones. Also, buyers can’t threaten to backwardly integrate into the smartphone industry because it’s not likely that a consumer would attempt to take apart a smartphone to produce his or her own smartphone to consume or sell. Buyers may also face some switching costs but mainly if switching between smartphones from different firms. For example, switching from an Apple iPhone to a Samsung Galaxy would be an example of a high switching cost for customers due to different software. Buyers have less power when switching, since they don’t want to take the time to learn and transfer all data.
Fourthly, the threat of substitutes is very weak. There isn’t an actual substitute for smartphones on the market that offers a more attractive price-performance trade-off, so there isn’t a chance of switching to one substitute. Tablets are the closest substitute. However, tablets are not only less convenient to carry but also most importantly cannot connect to a wireless service provider to make phone calls or text messages without Wi-Fi. The switching costs to substitute a smartphone are rather high because one would have to carry multiple products, such as a digital camera, laptop, planner, etc., to perform the functions of a singular smartphone.
Lastly, the rivalry among existing competitors is moderate to high in the industry in 2012. The incumbent firms are highly committed to the business and show no signs of exiting the industry. Samsung has committed to the mobile phone business since introducing its first built-in car phone in 1986 and shows a commitment to the smartphone industry by releasing their own series of phones with larger display – the Galaxy. Apple is also trying to capture more market share by offering features they previously could not offer, such as security and software developers’ kit.
Google disrupted the industry with its open-source software, Android OS, and thereby revolutionizing the smartphone industry by allowing smaller manufacturers entry into the industry. Also, each firm’s products/services are moderately direct substitutes for they have similar functions but a consumer’s perspective on each product or service determines the level of differentiation. Both Apple and Android smartphones have an app store that allows consumers to download apps for free or low cost for the purpose of use or entertainment. However, for example, many users might prefer Apple for they provide products that could connect and share the same data and information.
Based on the evidence and analysis of Porter’s Five Forces Model, there is serious profit potential in the smartphone industry. New firms face low fixed costs, which makes it easier to start manufacturing their own low-cost smartphones and enter the market. Advances in technology are mainly why rivalry and threat of new entrants is moderate to high. With rapid advancements in smartphones, an incumbent firm can either be unsuccessfully stagnant or behind or successfully progressing. However, even though there is not a substitute for smartphones, products and services amongst firms in the industry are direct substitutes dependent on the value customers perceive each to have. Overall, the forces are weak, so we can conclude that there exists some profit potential in this industry.
