How useful is Porter's Five Forces approach to understanding the new entrants into the router market in the late 1990's?

Essay by timtimUniversity, Master's January 2005

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In the mid 1990's, Cisco Systems (Cisco) was the dominant player in the US router market. Cisco had steadily expanded since its inception in 1984 and serviced internet service providers, phone companies and major corporations. Its "leadership was undisputed."

This position of leadership was altered with the entry of several new competitors into the high performance segment of the router market. In particular, Juniper emerged as a serious threat to Cisco by the year 2000.

The backdrop to the emergence of these new competitors was the rapid expansion of the internet and a corresponding escalation in demand for high performance routers. The new entrants had concluded that "a high performance segment within the IP router market would emerge with Cisco or without it."

This paper examines the usefulness of Porter's Five Forces approach in understanding the new entrants into the router market in the late 1990's, and concludes that the approach is useful as a base for further exploration of why the new entries took place.

Porter's Five Forces

We apply Porter's model to the router industry in the mid 1990's to gain an understanding of the industry structure:

Threat of new entrants

New entrants faced large capital requirements for product development as router technology was complex and took time to develop. However, this capital was being readily supplied to new entrants by venture capitalists and, in Juniper's case, technology heavyweights.

Cisco, as the incumbent, had a strong brand recognition and reputation ("Nobody ever got fired for buying from Cisco"). Cisco also had the cost advantages associated with market experience ("Cisco dominates the market, because if you're not participating in the internet you don't get the lessons in seeing how the software needs to evolve"). In addition, a new entrant was faced with building economies of scale to cover...