Verizon Communications, Inc., the parent company of Verizon Wireless, implements strategies to address the effects of external factors in the information and communications technology and services industry environment. Such external factors are distinguishable through a Porter’s Five Forces analysis of the company. Michael Porter’s Five Forces Analysis model is an external analysis framework that evaluates the conditions of the industry environment. For example, in the business operations of Verizon Wireless, the conditions of the wireless telecommunications industry are analyzed to determine the impact of external factors on the company. Also, this external analysis determines the intensity of each of the external factors and how they differ in their significance to the strategic approach of Verizon Wireless. As one of the biggest firms in the U.S. telecommunications market, the company needs to continually reinforce its business to address competition. Competition is shown as the most significant force in this Porter’s Five Forces analysis of Verizon.
Management personnel can use this external analysis to determine the appropriateness of the strategies of Verizon Communications, Inc. in addressing the most pressing concerns in its industry environment. This Porter’s Five Forces analysis can guide managerial decisions in addressing the impacts of the identified external factors. For example, because of the high intensity of competitive rivalry in the telecommunications market, it is essential that Verizon Wireless enhance its competitive advantages.
Summary & Recommendations: Five Forces Analysis of Verizon Communications, Inc.
Summary. The results of this external analysis indicate that competition is the force that has the highest intensity and corresponding influence in the industry environment of Verizon Communications, Inc. The identified external factors show that the threat of new entry has the lowest intensity among the five forces in the information and communications technology and services industry and, in particular, the telecommunications industry, where Verizon Wireless operates. The following are the intensities of the forces determined in this Porter’s Five Forces analysis of Verizon:
- Competitive rivalry or competition – Strong Force
- Bargaining power of buyers or customers – Moderate Force
- Bargaining power of suppliers – Moderate Force
- Threat of substitutes or substitution – Moderate Force
- Threat of new entrants or new entry – Weak Force
Recommendations. The following recommendations are based on the need to sustain the stability and growth of the business despite the five forces shown in this external analysis. For example, it is essential that Verizon Wireless maintain its growth through competitive advantage based on high quality of services and high economies of scale linked to its telecommunications infrastructure. Also, the company should aim to strengthen its business against external factors in the industry environment. Verizon’s mission statement and vision statement highlight technology as a central factor in strengthening the business. The high intensity of competitive rivalry must take priority in growth and expansion strategies. Based on the results of this Five Forces analysis, it is recommended that Verizon Communications, Inc.:
- Strengthen competitive advantage through product differentiation to address the force of competitive rivalry.
- Expand its infrastructure to maximize economies of scale and, thus, enable the company to maximize profits.
- Further enhance quality of services to attract and retain more customers, to address the bargaining power of customers.
- Enhance its marketing mix to ensure customer loyalty against competitors. Verizon’s marketing mix or 4Ps must reflect this enhancement.
Competitive Rivalry or Competition against Verizon (Strong Force)
This component of Porter’s Five Forces analysis determines the intensity of the force of competition against Verizon Communications, Inc. Competitive rivalry affects the telecommunications industry environment by imposing challenges on companies in growing and maintaining their market shares. In this external analysis, the strong force of competition against Verizon is based on the following external factors:
- Low product differentiation (strong force)
- High aggressiveness of firms (strong force)
- High exit barriers (strong force)
The telecommunications industry has a low degree of product differentiation because competing products are highly similar, with small differences based on some variables. For example, Verizon Communications, Inc.’s generic strategy and intensive growth strategies focus on quality as a differentiating factor to attract customers. Low product differentiation is an external factor that strengthens the intensity of competitive rivalry by making it easier for customers to consider changing their service providers. In the particular case of the wireless telecommunications market, Verizon Wireless attracts customers through the high quality of its services, but these services are still highly similar to competing services from other firms. On the other hand, the high aggressiveness of firms further strengthens the force of competition in the industry environment. For instance, Verizon Wireless and other firms aggressively compete through marketing campaigns and technological upgrades. Moreover, this external analysis identifies high exit barriers, which include the high cost of telecommunications infrastructure. This external factor discourages established firms from leaving the information and communications technology and services industry, thereby keeping competition high. Thus, this component of the Five Forces analysis of Verizon shows that competitive rivalry is a major force that shapes the strategies of the business.
Bargaining Power of Verizon’s Customers/Buyers (Moderate Force)
The intensity of customers’ impact is evaluated in this component of the Five Forces analysis of Verizon Communications, Inc. Customers or buyers affect the company’s revenues, profit margins, and business value. The following external factors contribute to the moderate bargaining power of customers on Verizon and the telecommunications industry environment:
- Low information asymmetry (strong force)
- Moderate switching costs (moderate force)
- Moderate price sensitivity (moderate force)
The low level of information asymmetry corresponds to the high quality of information that customers can access to know about products in the market. This external factor strengthens the intensity of the bargaining power of buyers or customers, based on variables like customers’ ability to evaluate and compare the services of Verizon Wireless and its competitors. Also, in this part of the external analysis, moderate switching costs have a considerable effect on customers’ power. For example, the moderate cost or consequence of transferring to other wireless telecommunications service providers commensurately limits the power of customers in influencing Verizon Wireless. Another notable external factor is the moderate price sensitivity of customers, which leads to the moderate likelihood of customers to use price as a basis in shifting from one service provider to another. Such potential shift is limited through differentiating variables, such as the company’s high service quality, which is among the main business strengths determined in the SWOT analysis of Verizon. Consequently, this component of the Porter’s Five Forces analysis of Verizon Communications, Inc. shows that customers’ demands and expectations exert a moderate force on the business and the industry environment.
Bargaining Power of Verizon’s Suppliers (Moderate Force)
In this component of the Five Forces analysis, the intensity of the influence of suppliers on Verizon and the telecommunications industry environment is considered. Suppliers affect the company’s supply chain costs, effectiveness and efficiency. In this case, the moderate bargaining power of suppliers of Verizon Communications, Inc. is based on the following external factors:
- Moderate size of individual suppliers (moderate force)
- Moderate population of suppliers (moderate force)
- Moderate overall supply (moderate force)
The moderate size of individual suppliers has a moderate contribution to the intensity of suppliers’ power. For example, an individual hardware supplier moderately influences the strategies of Verizon Wireless in the wireless telecommunications market. Also, because of their moderate population, suppliers exert a commensurately considerable force on the company and the industry environment. This condition enables suppliers to moderately influence Verizon’s operations management strategy, such as the strategy for the supply chain management of Verizon Wireless and other areas of the business. In relation, the moderate level of overall supply is considered as a significant factor in this external analysis. For instance, an individual supplier’s strategies have moderate and limited effect on the company’s supply chain. Such limitation is based on the company’s moderate access to other sources or suppliers. Thus, the external factors in this Porter’s Five Forces analysis indicate that suppliers’ bargaining power is a significant strategic concern with moderate impact on Verizon Communications, Inc.
Threat of Substitutes or Substitution (Moderate Force)
The intensity of the threat of substitution is determined in this component of the Porter’s Five Forces analysis of Verizon. Substitutes pose a threat in the information and communications technology and services industry environment by potentially reducing the market share and corresponding revenues of existing firms. In this external analysis, Verizon Communications, Inc. experiences the moderate threat of substitution based on the following external factors:
- Moderate switching costs (moderate force)
- Moderate availability of substitutes (moderate force)
- Low performance-to-price ratio of substitutes (weak force)
The intensity of the threat of substitution is partly based on moderate switching costs. For example, customers may face non-refundable expenses and downtime while shifting from Verizon Wireless products to substitutes. In addition, the moderate availability of substitutes is an external factor that corresponds to customers’ access to and potential use of such substitutes. On the other hand, the low performance-to-price ratio weakens the threat of substitutes against firms in the market. For example, despite moderate switching costs and availability of substitutes, such low ratio discourages customers from readily using substitutes instead of the services of Verizon Wireless. Nonetheless, the factors in this external analysis are subject to potential disruption in the industry environment through technological trends, such as the rapid advancement of information and communications technologies determined in the PESTEL/PESTLE analysis of Verizon Communications, Inc. Thus, the company must strategically keep abreast with the latest technologies and continue upgrading its systems to remain strong against potential substitution. Verizon’s strategies must include approaches to address the threat of substitution, which is a moderate issue shown in this component of the Five Forces analysis.
Threat of New Entrants or New Entry (Weak Force)
This component of the Five Forces analysis considers the intensity of the impact of new entrants on Verizon Communications, Inc. and the industry environment. New entry is a threat that could increase the level of competition and reduce prices and profit margins in the company’s telecommunications business. The following external factors contribute to the weak force of the threat of new entrants against Verizon:
- Moderate switching costs (moderate force)
- High capital requirement (weak force)
- High aggressiveness of existing firms (weak force)
Moderate switching costs determine the intensity of the threat of new entry in the industry environment. For example, this external factor corresponds to the moderate likelihood of customers to switch from services like those of Verizon Wireless to the services of new entrants or new firms in the wireless telecommunications market. On the other hand, the high capital requirement for establishing a business in the industry significantly weakens or reduces the threat of new entry. For instance, new wireless telecommunications firms will find it difficult to readily compete against Verizon Wireless because of the high capital needed to establish competitive telecommunications infrastructure. Furthermore, this external analysis identifies the high aggressiveness of firms as a determinant of the threat of new entrants. Established firms like Verizon are aggressive in competing in the market, thereby weakening the effects of new entry in the industry. Based on this component of the Porter’s Five Forces analysis of Verizon Communications, Inc., the threat of new entry is a minor issue in the business.
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