Running Head: Porter’s Five Forces Analysis of The Government Contracting & Procurement Industry
Porter’s Five Forces Analysis of the Government Contracting Industry
Porter’s Five Forces of the Government Contracting Industry
Introduction & Background
The U.S government is the world’s largest buyer of products and services. According to the National Contract Management Association, the federal government entered into nearly $450 billion of contract spending in 2014. Nearly $100 billion of that was contracted in Washington DC, Virginia and Maryland, which along with California and Texas make up the five largest contracting states with the federal government. Purchases by military and civilian installations amount to nearly $350 billion a year, and include everything from complex space vehicles to janitorial services (Government Contracting 101, 2015). Revenues for government contractors may be highly concentrated with one or a few customers. In addition, a government contracting business may be more tied to the success of the overall United States economy in comparison to a similar business operating in the private sector.
Completive Rivalry - High
The competiveness of the government contracting industry is significantly intensive. According to Bloomberg government, the top 10 federal contractors received roughly three of every ten dollars awarded from the government. Altogether, of the $440.8 billion in prime contracts awarded in FY15, the top 10 government contractors received $121.1 billion (Jack, 2016). The top 10 government contractors by revenue are:
1. Lockheed Martin Corp. - Obligations: $36.8B
2. Boeing Co. - Obligations: $16.5B
3. General Dynamics Corp.- Obligations: $13.8B
4. Raytheon - Obligations: $12.7B
5. Northrop Grumman - Obligations: $11.0B
6. McKesson Corp. - Obligations: $8.4B
7. United Technologies Corp. - Obligations: $7.2B
8. L-3 Communications Holdings Inc. - Obligations: $5.4B
9. Bechtel Group Inc. - Obligations: $4.9B
10. BAE Systems Plc - Obligations: $4.6B
Threat of New Entrants - High
New entrants to an industry bring new capacity and desire to gain market share that puts pressure on prices, costs and the rate of investment necessary to compete. When new entrants are diversifying from other markets they can leverage existing capabilities and cash flows to shake up competition. In the government contracting industry, the barriers to enter are incredibly high. Government contracting can be a highly rewarding industry but it also can carry out risks of uncertainties. Compliance with ever-changing federal regulations can be daunting enough to cause many to shy away from the industry. The threat of entry is limited due to the big businesses having proprietary technology, established brand identities, and cumulative experience in the industry (May, 2007), making it difficult for small businesses attain government contracts and compete with the big defense firms.
Threat of Substitutes - Low
Substitution reduces demand for a...