An organization must be aware of its industry dynamics in order to develop appropriate competitive strategies. It has to use market analysis tools to identify forces that impact on its competitiveness in the marketplace. Porter’s five forces provide a good framework for analyzing the factors that shape competition in the industry. It includes a set of macro- and micro-environmental forces that affect how companies compete. The five forces are the threat of new entrants, supplier power, buyer power, availability of substitutes, and competitive rivalry (Marshall & Johnston, 2014). Their relative strength determines how intense the competition is within an industry. This paper will use Porter’s five forces to analyze the Emirates Identity Authority (EIDA), a public company established in 2004 to offer residential identity documents and permits.
The Five Forces
Threat of New Entry
The level of competition in an industry depends on the number of players. The strength of this force depends on market entry barriers that make it difficult for new firms to enter the industry. Some of the obstacles to new entry include economies of scale, high consumer switching cost, patents, unfavorable legislations, high capital intensity, limited access to suppliers, etc. (Marshall & Johnston, 2014). High entry barriers would prevent new entry due to lower margins. EIDA, as the federal registration agency, has an exclusive right to register UAE residents and expatriates (Toma, 2015). The federal government regulates population registration services through EIDA. Therefore, government regulations constitute a key barrier to new entry.
Other potential obstacles include higher customer switching costs and intense capital requirements for establishing a national identification infrastructure. Only EIDA has the technological capacity and resources to conduct the registration of UAE citizens and foreigners. Overall, the entry barriers are comparatively high in this sector, which makes it very attractive. However, few firms can successfully enter this industry. The lack of direct competitors in this industry means that the level of price competition is low. Hence, EIDA enjoys relatively higher margins.
Power of Suppliers
Supplier power describes the leverage or advantage a supplier has in a transaction (Marshall & Johnston, 2014). A greater supplier power results in costly, but low-quality products, which causes a decline in industry margins. The number of suppliers in a given industry influences their negotiating power. Another factor affecting supplier power is the level of differentiation of the inputs required by companies (Marshall & Johnston, 2014). High supplier power exists when the threat of acquisition or merger is low, a brand is strong, a supplier is dominant, switching costs are high, and only specialized goods are offered.
EIDA’s operates a public procurement portal that it uses to source for supplies. A third party called Tejari manages EIDA’s procurement function on its behalf (Toma, 2015). The company has business relationships with key service providers, including OT Morpho and Emartech, which supply it with technology products. The availability of only a limited number of suppliers offering specialized technology products implies that they wield significant supplier power. The likelihood of forward integration with these suppliers is low because they are highly differentiated. Further, the fact that EIDA relies on the IT infrastructure provided by these providers means that the switching costs are also high. Overall, the power of suppliers is relatively high in this industry.
Power of Buyers
The amount of buyer power depends on supplier power. In markets where buyers wield high negotiating power, product prices are likely to be low (Marshall & Johnston, 2014). Thus, buyer power is a key determinant of industry value or margins. According to Marshall and Johnston (2014), the main forces influencing buyer power include concentration of users in a given market, the level of consumer awareness, and number of competitors. Therefore, high buyer power occurs when there are significant risks of backward integration and low switching costs. Other situations include the presence of large-volume buyers and the availability of better alternatives in the market.
EIDA’s customers have moderate buyer power. The organization’s strategy is to register and issue portable smart IDs to Emirati nationals and citizens of other GCC countries living in the UAE (Toma, 2015). The other market segments comprise state agencies and private firms that use e-government services. They tend to have some negotiating power. The integrated smart ID will allow bearers to use government services via online portals. Given that registration is mandatory and only EIDA issues identification documents, it can be concluded that buyer power is moderate. In this industry, the risk of backward integration is low, but the cost of switching to another company is high. Further, there are no alternatives available in the market since the national ID is a mandatory document for all UAE citizens and expatriates. Overall, the buyer power is moderate in this industry.
Availability of Substitutes
Marshall and Johnston (2014) describe substitutes as alternative products or services that satisfy consumer needs in the same way a company’s offering does. The availability of a broad range of substitutes in the market results in low switching costs. Alternative products stimulate intense competition, which result in lower commodity prices. Thus, substitutes pose a risk to market profitability and performance as customers can easily switch to cheaper alternatives. The threat of substitution exists when products have similar prices and existing products have generic substitutes (Marshall & Johnston, 2014). Customers can also substitute items that are not necessary to day-to-day living.
EIDA operates a big database containing over 105 million personal records of all UAE citizens and foreigners. The data include biometrics such as fingerprints and facial images (Toma, 2015). Individuals are issued with a smart ID that allows them to be identified biometrically. The other companies, including financial institutions and insurance providers, have less comprehensive databases. Therefore, the threat of substitution is relatively low in this sector. EIDA allows restricted access to personal records by related agencies and institutions, which means that its database is the primary source of biometric data for companies and individuals.
EIDA benchmarked the smart ID against similar products in countries such as Bahrain and Singapore (Toma, 2015). This innovative product has no generic substitutes. The agency also uses ISO certified systems to transmit data to users or companies securely. No UAE firm can emulate these systems, attempt to produce smart IDs, or provide similar services due to government restrictions. Given this monopoly, the overall threat of substitution is very low.
The degree of rivalry is associated with low returns due to the high cost of unhealthy competition (Marshall & Johnston, 2014). Much of the value of the industry is lost when competition between players is intense. Nonetheless, the intensity of industry rivalry is the key determinant of its attractiveness to new entrants. Firms can compete in relation to product prices or quality (Marshall & Johnston, 2014).
The key indicators of high rivalry include similar products, a high concentration of direct competitors, a saturated market, and significant exit barriers. Intense competition is likely to arise in business environments with many substitutes. Further, low supplier power and high buyer power can create conditions that result in a rivalry between players. Rival firms usually offer products or services of comparable quality or similar prices. The structuring of the market shapes competitive behavior, which then influences performance (Marshall & Johnston, 2014). A less intense competition is likely to lead to higher profits and industry value than cutthroat rivalry.
EIDA is the only company mandated to register and provide identification documents to UAE citizens and noncitizens. It also maintains a secure national database that other firms rely on for the biometric data of their clients. Direct competitors are lacking in this industry. Furthermore, the market is not fully saturated because of new persons traveling into the country that need to be registered. Exit costs for EIDA are very high given the huge investments that have gone into developing the current infrastructure that allows for a universal access to personal data. All these are indicators of a low level of competitive rivalry in this industry.
Porter’s five forces is a useful tool for evaluating a market’s attractiveness. It comprises five interrelated factors that determine the nature of rivalry in the sector. High buyer and supplier power, significant entry obstacles, and substitution threats result in greater competition between firms. From the analysis, it is clear that the threat of new entry into EIDA’s industry is low. However, the supplier power is high, while buyer power is moderate. On the other hand, the threat posed by alternative products and competition is low in this industry.
Marshall, G. W., & Johnston, M. W. (2014). Marketing management. New York, NY: McGraw-Hill Education.
Toma, M. (2015). Strategy formulation: Emirates identity authority strategic plan 2014-2016. Web.