(a) Background section of consultancy report
One mark per relevant point for discussing any relevant environmental model such as Porters five forces, or PESTLE.
Introduction
The first part of this report analyses DCS Company’s market and the industry using the Porter’s Five Forces model.
(i) Bargaining power of buyers
DCS is competing in two markets. In the data communications component market which is more mature and where it has less than 1% of the market share, it is a supplier of marginal significance, despite 65% of its gross profit or cash contribution being generated in this segment. Its customers in the neighbouring single market (30%) with its own currency are likely to demand low prices, high quality and reliability. They may not accept late delivery of orders. It appears that alternative sources of supply are readily available and that switching costs are relatively low. Multinational
OEMs have significant bargaining power in this market, particularly the OEM which accounts for 40% of DCS’s current data communications component sales.
In the second market, where network management systems are supplied to mainly domestic, SMEs and a few larger companies, the buyers appear to have less bargaining power. DCS is catering for each customer’s specific needs and so each solution is, to some degree, a bespoke solution. This makes it much harder for buyers to compare products and prices of potential suppliers. Alternative sources of supply are much more difficult to find as there only three companies (including DCS) in this specialist marketplace.
The bargaining power of suppliers
Although DCS manufactures 50% of all components used in its data communications products, reducing its overall reliance on suppliers in this sector, it seems unlikely that DCS will be able to exert much influence on its suppliers, which provide the other 50%. As a relatively small player in the data communications market, the company does not have the power to exert buyer pressure on its two large suppliers, either in terms of price or delivery. Current problems associated with the delivery of components are having a significant impact on the company’s ability to meet customer deadlines and expectations.
Suppliers of financial capital, namely lenders, have gained more bargaining power as DCS has had to borrow more to sustain their recent growth.
If labour is seen as a supplier, then evidence again suggests that DCS is in a relatively weak position particularly since there has been a limited trade union membership since 2006. However, the union members are mainly in the data communications components division where employee remuneration and employment rights are already compliant with
Prydain’s national employment laws. The scenario also indicates the difficulty of finding high calibre network staff with
DCS’s small size and location making it difficult to attract the key personnel necessary for future growth in this sector.
Threats from new entrants
DCS is operating in an industry where the costs of entry are significant because it is capital and knowledge intensive.
Economies of scale compel new entrants to enter at significant output levels or suffer a cost disadvantage. Furthermore, the need to offer comprehensive aftersales support, although a problem for DCS, does also create a significant barrier
to new entrants. Finally, the exit costs and barriers such as industry-specific knowledge, skills and assets, reduce the attractiveness of the marketplace to new entrants.
Threats from substitutes
There is evidence that large, successful, high technology companies are particularly vulnerable to ignoring the challenge from disruptive new technologies which can replace the need for certain high technology products and services overnight. However, the relatively small size of DCS may give it a competitive advantage in its ability to respond quickly and flexibly to change, as long as it can attract the right calibre of expertise to achieve this.
Rivalry amongst competitors
Very different levels of competition are being experienced in the two market places DCS is operating in. It is clear that the high volume, low-margin component business offers intense competition with buyers who are able to use their size to extract favourable prices. DCS only has 1% of this market. The ability of DCS to generate better market share and volumes through product innovation in this market seems highly unlikely.
The intensity of rivalry in the network management systems sector is significantly less in this specialist market. DCS is dealing with a smaller number of large and medium-sized users, designing products specific to their needs. In Porter’s terms, DCS is adopting a focused differentiation strategy. In these low-volume high-margin markets, the emphasis has to be on increasing the volume side of the business, but at the same time making sure that they have the resources to attract and support new customers.
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