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Note: Under the software industry there are two type of players in the

market out of which some are organized players & some are unorganized
player. So I have concentrated on the organized players of the industry

MICHAEL PORTER’S FIVE FORCES MODEL


Michael porters five forces model provided a framework that models an industry as
being influenced by five forces. The strategic business manager seeking to develop an
edge over rival firms can use this model to better understand the industry context in
which the firm operates.
The elements of each of the forces and the extent and /or effect of each element in the
context of the software industry have been analyzed and enumerated below.
Threat to New Entrants (HIGH)
Differentiation (Low)

Brand capital investment


(Low)

Initial capital investment


(Low)

Clients switching cost


(Low)

Economies of scale
(Moderate) Bargaining power of
Bargaining power of customer (High)
supplier (Low) Buyers switching cost
Availability of (low for customized
vast pool & Industry competitors software, high for
talent (High) (High) buying products)
No of players (High)
Skill Industry growth (High) Buyers concentration
Differentiation Degree of differentiation (High)
(Low) (Low)
Exit barriers (Low) Buyers price sensitivity
Buyers Client switching cost (Low) (High)
concentration
(High) Buyers information
availability (High)

Threat to substitutes
Hardly any
1. INTENSITY OF RIVALRY (HIGH)
The intensity of rivalry competitors in an industry refers to the extent to which
firms within an industry put pressure on one another and limit each others profit
potential. According to porters 5 forces industry analysis framework, the intensity
of rivalry among existing firms is one of the forces that shape the competitive
structure of an industry.

Competitors Rivalry
High Medium Low
Factors Attractiveness
No of competitors √ High
Industry growth √ High
Degree of √ Low
differentiation
Exit Barriers √ Low
Clients switching √ Low
cost

 No of competitors
Software industry consists of numerous players, because of the rivalry will be
more intense. Presence of a large number of players in industry leads to
competition and rivalry among companies. Threat from rivalry and competition
poses a threat to domestic companies.
 Industry growth
Indian software industry has registered a strong rate in the past few years.
Outsourcing has played a major role in the growth of Indian software industry.
Software export has registered a very strong annual average growth rate of 45%
during past years. Software industry is one of fastest growing industry in India.
 Degree of differentiation
Industry’s offerings are undifferentiated which leads to high rivalry. Industry
players are providing equivalent after sales services, which includes installation,
training etc.
 Exit barriers
Exit barriers for existing software companies are low as the initial capital
requirement is low in software industry.

 Clint’s switching cost


When clients switching cost is low, industry rivalry is more intense. Clients
are articulate for their need and generally ask for customized product. So
switching from one product to another is not taken place generally and if they
switch, they generally go for the software which suits to their current platform and
configuration and prefer the same vendor. So, for customized software, clients
switching cost is low.

2. BARGAINING POWER OF SUPPLIERS (LOW)


Factors Suppliers power
High Medium Low
Attractiveness
Availability of vast √ High
talent pool- fresher
and experience
Skill differentiation √ Low
Buyers concentration √ High

 Availability of vast talent pool


Software professional are widely present across the globe,
including fresher and experience which provide employers high
benefit to recruit at competitive salary package. There is a large
supply of trained and educated professionals.
 Skill differentiation
There is a low skill differentiation among the software
professionals which makes the employers able to switch human
resources.

 Buyer concentration
When buyer’s concentration is high, suppliers power is low,
employer are more concentrated & focused for their required human
resource skill.
Other factors which make the suppliers power low are due to slow
down, job cuts and layoffs.

3. Bargaining power of customers (High)

Buyers Power Attractiveness


High Medium Low
Factors
Buyers switching √ Low
cost
Buyers √ High
concentration
Buyers price √ High
sensitivity
Buyers √ High
information
availability

 Buyers switching cost


When clients switching cost is low, buyers power is higher.
Clients are articulate for their need & generally ask for customized
product. So switching from one product to another is not taken place
generally and thus buyers switching cost is low where as it is high for
buying products at the organization level as it requires high
investment in terms of money as well time. Employees do not accept
the change easily which affects their productivity.

 Buyers concentration
If buyers are concentrated compared to sellers, if there are few
buyers and many sellers buyer power is high. Generally buyers go for
customized software, on time investment, which makes them more
concentrated.
 Buyers price sensitivity
If the consumer is price sensitive & well educated regarding the
product, the buyer power is high. Market is highly price conscious &
promotion driven. Outsourcing has major role in Indian software
industry; international clients are more prices sensitive.
 Buyers information availability
As the software products are developed based on clients
requirements, buyers are well informed about the software products.
Other factors affecting

4. Threats of new entrants (High)


Threat of New Entrants Attractiveness
High Medium Low
Factors
Differentiation √ Low
Brand √ Low
establishment
Initial capital √ Low
investment
Clients switching √ Low
cost
Economies of √ Moderate
scale

 Differentiation
Highly differentiated products or well known brand names are
both barriers to entry that can lower the threat to new entrants.
Differentiation can be done in many ways but it’s costly for the
company. Industry offerings are undifferentiated which leads to high
rivalry. Industry players are providing equivalent after sale services,
which includes installation, training etc.
 Brand establishment
In software industry, branded products do not have any impact
on client’s requirement. Thus, brand establishment is low & which
makes low barrier for new entrants.
 Initial capital investment
Initial capital investment is low in establishing new company in
software industry. Software industry is based on intellectual property &
thus it does not require higher capital investment.
 Economies of scale
Due to financial crisis, many companies share their human
resource skill to handle more than one project. By resource sharing
they develop more software products. Thus an economy of scale is
moderate.
Another reason for high threat of new entrants are favorable
government policies. Location is one of the favorable factors as such
location does not have any major impact on soft ware development &
target market.

5. Threat of substitutes
There is no close substitute of software.
SUMMARY
Porters five forces High Moderate Low
Intensity of rivalry √
Bargaining of √
supplier
Bargaining power √
of buyers
Threat to new √
entrants
Threat of - - -
substitutes

PESTEL ANALYSIS
1) Political factors
 Political stability: Indian political structure is considered

stable enough expect the fact that there is a fear of hung


parliament (no clear majority- currently fear is less)- (+ve)
 Government owned companies and PSUs have decided to

give more IT projects to Indian IT companies. –(+ve)


 Terrorist attack or war. –(moderately –ve)

2) Economical factors
 Global IT spending (demand) (-ve)

 Domestic IT spending (demand): Domestic market grows by

15% in 2010. –(+ve)


 Currently fluctuation (-ve)

 Attrition: due to economy slow down, which result in low

attrition rate (moderately +ve)


 Economic attractiveness: Due to cost advantage and other

factors (+ve)
3) Social factors
 Language spoken: English is widely spoken language in

India English medium is the most accepted medium of


education (+ve)
 Education: Large number of technical institutes &
universities over the country provide IT education (+ve)
 Working age population. (+ve)

4) Technological factors
 Telephony (+ve)
 Internet backbone: Due to IT revolution in 90’s India is well

connected with undersea optical cable (+ve)


 New IT technologies like SOA, web 2.0, high definition

content, grid computing, & innovation in low cost


technologies is presenting new challenges & opportunities
for Indian IT sector. (+ve)
5) Legal factors
 IT SEZ requirement: IT companies can set up SEZ with

minimum area of 10 hectares and enjoy a host of tax benefits


and fiscal benefits. (+ve)
 Contact/ bond requirements: Huge debates surrounding the

bonds under which the employees are required to work, which


is not legally required. (-ve)
 IT Act: Indian government is strengthening the IT act, 2000 to

provide a sound legal environment for companies to operate


esp., related to security of date in transmission and storage, etc.
(+ve)
 Companies operating in Software Technology Park (STPI)

scheme will continue to get tax benefit till end of 2010.


(moderately +ve).