Business, Management

IBM Five Forces Analysis & Recommendations (Porter Model)

Updated on Updated on by Christine Rowland
IBM Five Forces Analysis, competition, customers, suppliers, substitution, new entry, Porter, information technology case study recommendations
IBM building in Azorim Park, Israel. This Five Forces analysis of International Business Machines Corporation (IBM), based on Porter’s model, presents external factors that make competitive rivalry a strong force in the information technology industry environment. (Photo: Public Domain)

International Business Machines Corporation (IBM) applies strategies to address a wide variety of issues in the information technology industry environment, such as the external factors shown in this Five Forces analysis of the business. Michael E. Porter’s Five Forces Analysis is a strategic management tool that identifies the external factors and their intensities in contributing to the five forces (competitive rivalry, buyer power, supplier power, substitution threat, and new entry threat) that shape the competitive landscape of the industry environment. In the case of IBM, the external analysis considers the situation of the information technology industry. There is a wide array of factors that influence the actual performance of Big Blue, but the external factors presented in this analysis are some of the most significant and relevant to the business. For example, IBM’s financial performance is directly connected to the organization’s ability to address the external factors linked to the strong intensity of the force of competitive rivalry. In this regard, it is essential to take appropriate action to address the issues shown in this Five Forces analysis of IBM.

Investors can use the results of this Five Forces analysis of IBM in making decisions regarding their investments in the company. For example, the presence of strong forces in all aspects of the external analysis may equate to the company’s difficulties in successfully implementing its strategies based on the conditions of the industry environment. IBM’s priorities in addressing external factors must match the force intensities in this Five Forces analysis.

Summary & Recommendations: Porter’s Five Forces Analysis of IBM

Summary. Competition or competitive rivalry is the highest-intensity force in the industry environment of IBM. Each of the other forces has a moderate intensity. Thus, this external analysis shows that competition must take the highest priority in IBM’s strategic formulation. This prioritization must facilitate continued business growth in the information technology industry. However, the external factors in this Five Forces analysis of IBM also point to the significance of the other forces in strategic success. For example, the bargaining powers of customers and suppliers and the threats of substitution and new entry are significant in determining the company’s performance. Based on the results of this Five Forces analysis, the following are the intensities of the five forces that influence IBM’s business:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (moderate force)
  3. Bargaining power of suppliers (moderate force)
  4. Threat of substitutes or substitution (moderate force)
  5. Threat of new entrants or new entry (moderate force)

Recommendations. Considering that competition is the strongest force in this Five Forces analysis of IBM, strategic efforts must focus on improving competitive advantages. This recommendation addresses the need to support the industry leadership aims established in IBM’s vision statement and mission statement. For example, the company can improve IBMers’ talents and skills to maximize business competitiveness through expertise in information technologies. IBM’s organizational culture (work culture) can support such a human resource development strategy. Another recommendation based on this Five Forces analysis is to emphasize breakthrough innovation in the company’s research and development efforts. Such breakthrough innovation should contribute to the extensive intellectual property portfolio, which is one of the main strengths identified in the SWOT analysis of IBM. Based on this Five Forces analysis, it is also recommended that the company enhance product development, innovation and management for competitive advantage through established institutions in the business. For instance, adjustments in the components of IBM’s organizational structure (business structure) can support this enhancement strategy for competitive advantage. Furthermore, the company must address the other forces included in this Five Forces analysis, considering their moderate intensities and the significance of their contributory external factors.

Competitive Rivalry or Competition with IBM (Strong Force)

The degree or intensity of competition is evaluated in this aspect of the Five Forces analysis of IBM. Competitors impose pressure on the company in terms of market share, pricing, and profits, among other variables pertinent to the information technology industry environment. In this case, the strong intensity of competitive rivalry against IBM is based on the following external factors:

  • Moderate degree of differentiation (moderate force)
  • High imitation potential (strong force)
  • High aggressiveness of firms (strong force)

IBM’s external environment involves moderately differentiated competitors. This considerable but limited differentiation is evident in the variations in the features of products available in the information technology industry. For example, some companies offer mainly data-mining products, while other companies provide mainly transaction-processing products or artificial intelligence. In the Five Forces analysis context, this external factor makes a moderate contribution to the force of competitive rivalry against IBM, involving Hewlett Packard Enterprise, Oracle, Microsoft, Amazon, Google (Alphabet), Intel, and other technology and service providers. On the other hand, the high imitation potential is a strong force that enables competitors to offer products that are similar to those of the company. IBM’s generic competitive strategy and intensive growth strategies involve cost leadership, which comes with the imitability of some of the company’s product features, such as the characteristics of servers. In addition, the high aggressiveness of firms further intensifies the force of competition in the industry environment. This aggressiveness is applied in marketing campaigns, product development, and other areas of business. Consequently, this aspect of the Five Forces analysis shows that IBM must strengthen its competitive advantage to deal with the strong force of competition.

Bargaining Power of IBM’s Customers/Buyers (Moderate Force)

The power of customers or buyers to bargain or impose their demands is determined in this aspect of the Five Forces analysis of IBM. Customers are the source of the company’s revenues, thereby directly affecting the profits and financial standing of the information technology business. The following external factors contribute to the moderate intensity of the bargaining power of customers in IBM’s industry environment:

  • High number of customers (weak force)
  • Moderate size of each order (moderate force)
  • Moderate cost of switching (moderate force)

The high number of customers is an external factor that has a weak contribution to the bargaining power of buyers in the information technology industry. In the Five Forces analysis context, this condition weakens individual customers’ influence on IBM. However, the moderate size of each order strengthens customers’ power in the industry environment. For example, a company with nationwide operations in the food service industry orders thousands of machines from IBM. Such size of purchase considerably intensifies the bargaining power of buyers. The cost of switching is also included in this aspect of the external analysis of IBM. Such a cost is moderate in the information technology industry. For instance, even though changing a provider of business machines may be costly, customers, especially large ones, can still do so to a limited extent. Thus, this aspect of the Five Forces analysis reveals the moderate significance of customers’ bargaining power in IBM’s strategic plans.

Bargaining Power of IBM’s Suppliers (Moderate Force)

Suppliers’ impact on IBM’s business and the industry environment is assessed in this aspect of the Five Forces analysis. Suppliers have leverage in terms of their direct effect on the company’s supply chain, as well as the quality and price of materials available to the information technology business. In this external analysis, the following are the intensities of the external factors that maintain the moderate force of the bargaining power of IBM’s suppliers:

  • High overall supply (weak force)
  • Moderate size of individual suppliers (moderate force)
  • Low ability to substitute supply (strong force)

The supply chain area of IBM’s operations management is under the influence of the moderate force of the bargaining power of suppliers. Also, this bargaining power of suppliers is one of the bases used for supplier-support programs included in IBM’s corporate social responsibility (CSR) strategy. The high overall supply is an external factor that weakly intensifies this force among the Five Forces. For example, an individual supplier’s change in operations has a low impact on the overall supply level, thereby also having a low impact on IBM. On the other hand, the moderate size of individual suppliers has a correspondingly moderate contribution to supplier power. For instance, because of the scale of its operations, a global supplier of raw materials for the manufacture of computing hardware can have a considerable but moderate impact on IBM. The power of suppliers is also strengthened because of the low ability of the company to substitute its supply, based on the specific material requirements of the business. Based on this aspect of the Five Forces analysis of IBM, suppliers are a major strategic consideration in the industry environment.

Threat of Substitutes or Substitution (Moderate Force)

The business performance of IBM is subject to the force of substitutes, as determined in this aspect of Porter’s Five Forces analysis of the information technology industry environment. Substitution threatens the company in terms of reduction in revenues. This external analysis considers the potential of successful substitutes to put established firms out of business. The external factors that lead to the moderate intensity of the threat of substitution against IBM are as follows:

  • Moderate cost of switching (moderate force)
  • Moderate availability of substitutes (moderate force)
  • Moderate perceived level of product differentiation (moderate force)

The moderate cost of switching creates a considerable barrier against customers’ use of substitutes for IBM’s information technology products. For example, customers may incur some costs from changing their equipment, but such costs may be within their financial capacities. Also in the Five Forces analysis context, the moderate availability of substitutes is an external factor that has a modest effect on customers’ tendency to use substitutes instead of IBM’s products. On the other hand, the moderate perceived level of product differentiation refers to customers’ perception of the comparative uniqueness of products, including substitutes. This external factor correspondingly encourages IBM’s customers to consider using substitutes that might have the features they need. These factors lead to the moderate intensity of the threat of substitution in the industry environment. Therefore, this aspect of the Five Forces analysis of IBM suggests the significance of substitution in influencing business performance.

Threat of New Entrants or New Entry (Moderate Force)

The effect of new entry on business performance is addressed in this aspect of the Five Forces analysis of IBM. New entrants or new firms add to the overall level of competition and can reduce the company’s share in the information technology market. IBM must consider the following external factors that contribute to the moderate intensity of the threat of new entry in the industry environment:

  • High imitation potential (strong force)
  • Moderate cost of switching (moderate force)
  • High cost of entry (weak force)

Just as it contributes to the force of competitive rivalry, the external factor of high imitation potential has a strong contribution to the threat of new entrants facing IBM in this Five Forces analysis. For example, new entrants could succeed by developing information technology products that are similar to IBM’s. On the other hand, the moderate cost of switching has a considerable contribution to the intensity of this force. This indicates that IBM’s customers are moderately likely to use new entrants’ products. However, the high cost of entry, which pertains to the cost of establishing operations in the industry, weakens the threat of new entrants. Nonetheless, motivation for new entry may remain, based on the technological integration trend in different industries, as determined in the PESTEL/PESTLE analysis of IBM. Still, the combination of the external factors in this aspect of the Five Forces analysis leads to the moderate force and significance of the threat of new entrants.

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