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Porter's Five Force Analysis based on the Semiconductor Industry

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Damian Starek

on 6 March 2012

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Transcript of Porter's Five Force Analysis based on the Semiconductor Industry

Porter's Five Force's Analysis Tool Threat of substitue products Barganing Power of Buyers Barganing Power of Suppliers Rivarly between the firms Threat of New Entrants The Semiconductor Industry Main Products:
Microprocessors (CPU)*
Computer Memory (RAM)
System on Chip (SoC)
Formed around 1960
Worth over 249 bn USD today
Two major semiconductor corporations Market-share: 80% 19% *Main focus for today's presentation Force 1: Threat of New Entrans $2 billion to establish new factory $500M R&D costs to develop a new CPU Old technologies are quickly replaced by new ideas through fast paced innovation Reliability and perfomance of computer systems is critical to everday life and business operations Existing companies in the semiconductor industry are protected by immense barriers of entry Technology News
======================================= iPad beats PC in sales March 6th 2012 Apple sold more tablets last quarter than any single OEM sold PCs Force 2: Barganing Power of Buyers Decrease Buyer Power dependant on:
Importance of the product to the quality of buyers product (e.g. Processor in a computer)
Intesivness of competition
Product differentiation
Cost of an item in proportion to the total cost Threat of entry depedant on:
Capital requirements
Economies of scale
Importance of branding (product differentation)
Legal barriers (patents)
Ability to influence product prices Ability to play companies against each other Ability to demand higher quality goods V.I.P - Very Important Processor Vertical integration - producing the good yourself Force 3: Barganing Power of Suppliers Force 4: Threat of substitute products Barganing power of Suppliers depends on:
Easiness to switch suppliers
No. of suppliers
Type of supplier (e.g. commodity)
Strength of labor unions Sillicon: most of the CPU is made out of it Quartz (sillicon dioxide): second most abundant mineral on Earth Buyers (e.g. Intel) Porters Five Forces Industry Analysis Tool Suppliers Large number of suppliers means the buyers can place pressure and each individual supplier will try and supply higher quality material than the other. Buyers therefore have some power of price negotiation, but this is only applicble to large corporations (e.g. Hewlett-Packard) Mostly the buyers of microporcessors are large corporations, either manufacturing computers or creating their own servers. Force 5: Competition amongst rivals in the industry Threat of substitute products depends on:
The universality of a product (i.e. different operations a product can do or be used for)
The technical complexity of a product
Patents/legal barriers

Threat of counterfeit products may be considered This is a Processor from the inside
Semiconductor products are technologically advanced and require special equipment to construct
Semiconductor devices perform very specific tasks in a very rigid computer environment, therefore there are no substitutes for it
Therefore they are hard to counterfeit. BUT! There is a growing amount of counterfeit microelectronic products sold on the market
This shows the increasing specialization of manfucaturer's of counterfeit products, as to the the ability to copymore complaicated products
However in all situations they do not match the speed nor reliability in comparison to the original products
Therefore there is little threat, but the growing trend must be taken into account Source: U.S. Department of Commerce, Office of Technology Evaluation Threat of substitues?
For the short-term there is no threat of any substitute
Possible discovery of a new material could lead to newer generation of microelectronic devices, but research is in early stages Scientists are currently researching a new base material for microelectronic products
Graphene (visible on the left) is a potential substitue to sillicon
But estimates show that sillicon will still be in use for another 15 years or more
However a discovery of a new material could bring in new companies and possibly substitue products
Rivarly between established competitors depends on:
Seller concentration
Product differentation
Excess capacity and exit barriers
Economies of scale and ratio of fixed costs to total costs Competition is based on: Speed Reliability Efficiency Companies in the CPU segment of th semiconductor industry operate in a duopoly
Production is very focused (i.e. CPUs) Due to the importance of microelectronics in today's world and high demand for them, companies in the semiconductor industry have high profit margins. E.g. Intel 24% in 2011
However the industry is very prone to business cycles Conclusion Ranking the 5 Forces:

Threat of new Entrants: very low
Barganing Power of Byers: low, but some influence possible
Barganing Power of Suppliers: very low
Threat of substitute products: very low in the short and medium term
Rivarly between Established FIrms: very high

Therefore the industry is:
Very profitable to established companies
Barriers to entry are very high - new companies cannot join
Competition amonsgt existing firms is very fierce The changing trends in technology affect the competition levels in the industry.
- Changes in consumer tastes (like the growing popularity of tablets and declining demand for PCs, means that companies like Intel perform worse and companies like Apple or Samsung perform better
- This means that different companies in different segments of the semiconductor industry can become direct or indirect competitors
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