Description
In linear algebra, the determinant is a value associated with a square matrix. It can be computed from the entries of the matrix by a specific arithmetic expression, while other ways to determine its value exist as well. The determinant provides important information when the matrix is that of the coefficients of a system of linear equations
STUDY REPORTS ON STRATEGIC DETERMINANTS IN THE SOFTWARE INDUSTRY
Abstract It is generally recognized that firms face both internal and external environmental forces. However, few studies have attempted to describe the importance of various strategic factors and the relation between them. This study has been conducted to identify the main strategic determinant in the software industry and the reason behind the existence of these determinants. The study is based on a qualitative study. The empirical data have been collected from interviews. However, the frame of reference is based on well- established theories within the field of business strategy. The research identified certain strategic determinants in software industry. These are Market/Customer, Technology, Economy, Rivalry, Core Competences, Core Products, Technical and Human Resources. These factors have an impact on researched firms separately and jointly as well. However, competitive advantage can be achieved by focusing on product innovation and development, relation building with customers, technology and human resource management, capabilities/competences building and alliances with other companies and industries.
Nyckelord Keyword Software industry, strategic determinates, internal environment, external environment
Table of Content 1. INTRODUCTION????????????????.1
1.1. BACKGROUND..........................................................................................1 1.2. PROBLEM STATEMENT.....................................................................3 1.3. PURPOSE.......................................................................................................4 1.4. DELIMITATIONS .......................................................................................4 1.5. TARGET GROUP......................................................................................5 1.6. READERS GUIDE ....................................................................................6
2. THEORY
OF
SCIENCE
AND METHODOLOGY??.....???????????7
2.1. RESEARCH POSITION........................................................................7 2.2. RESEARCH APPROACH ...................................................................9
2.2.1. Deduction vs. Induction??????..?.???????????????????..10 2.2.2. Qualitative vs. Quantitative??????..???????????????????.11
2.3. RESEARCH METHOD.??????????..?11
2.3.1. Primary data???????????..?...??????????????????..12 2.3.2. Secondary data?????????.?.?...??????????????????.19 2.3.3. Reliability and Validity???????.????????????????????..19
3. FRAME OF REFERENCE????.???...23
3.1. THE EXTERNAL ENVIRONMENT????.???23
3.1.1. Macro environment????????????????????????????..24 3.1.2. Industry?????????????????????????????????..25 3.1.3. Market segmentation???????????????????????????...29 3.1.4. Strategic group??????????????????????????????.30
3.2. THE INTERNAL ENVIRONMENT??????.? 31
3.2.1. Strategy - firms' purpose?????????????????????????? 33
3.2.2. Resources.................................................................................................................................... 33 3.2.3. Capabilities/competences............................................................................................................ 36
3.3. SOURCES OF SUPERIOR PERFORMANCE???..?....???... 36
3.3.1. The external environment? ........................................................................................................ 38 3.3.2. The internal environmen.............................................................................................................. 44
3.4. DISCUSSION ...??????????????????..????..??..??. 50
3.4.1. Turning the inside out .................................................................................................................. 50 3.4.2. The paradox................................................................................................................................. 51 3.4.3. Strategic determinants................................................................................................................. 53
4. EMPIRICAL DATA ............................................................. 57
4.1. BIG COMPANIES????..???????????..??????...???.? 57
4.1.1. Company B1 ................................................................................................................................ 57 4.1.2. Company B2 ................................................................................................................................ 61 4.1.3. Company B3 ................................................................................................................................ 64
4.2. SMALL COMPANIES?????????????.???????.?..??.. 66
4.2.1. Company S1 ................................................................................................................................ 66 4.2.2. Company S2 ................................................................................................................................ 69 4.2.3. Company S3 ................................................................................................................................ 71
5. ANALYSIS ...................................................................................... 75
5.1. THE STRATEGIC DETERMINANTS REGARDING
EXTERNAL ENVIRONMENT????????????.???????.??.?... 75
Big companies ...................................................................................................................................... 76 Small companies .................................................................................................................................. 79
5.2. THE DETERMINANTS REGARDING INTERNAL
ENVIRONMENT??????...??????????????????..??..??..?
Big companies????????????????.???????????????..??..?..? 81 Small companies???????????????????.???????????..????..?83 81
5.3. COMPARISON STRATEGIC DETERMINANTS ACCORDING
SMALL AND BIG COMPANIES??.???????.?????..??.?..?? 85
5.4. THE RELATION BETWEEN DIFFERENT INTERNAL AND
EXTERNAL ENVIRONMENTAL FACTOR????????.?..??..?? 87
5.5. FIRM'S FOCUS IN ORDER TO HANDLE THE MAIN
STRATEGIC DETERMINANTS IN THE SOFTWARE INDUSTRY??????????????.??.?89
6. CONCLUSION?????????????.???..? 93
6.1. STRATEGIC DETERMINANTS IN THE SOFTWARE
INDUSTRY................................................................................................................
94
6.2. THE RELATION BETWEEN EXTERNAL AND
INTERNAL ENVIRONMENT FACTORS ............................................
94
6.3. STRATEGIC FOCUS........................................................................... 95
6.4. PERSONAL REFLECTION ON WRITING THESIS PAPER
............................................................................................................................ .. 96
7. REFERENCES?????????????..??.?...97
THESIS WRITING................................................................................................97 BOOKS........................................................................................................................97 ARTICLES...............................................................................................................101
INTERVIEW GUIDE APPENDIX A ????..?????...?????. 104
List of Figures and Tables
FIGURE 2.1 - DEDUCTIVE AND INDUCTIVE APPROACH......................................... 10 FIGURE 3.1 - FIVE COMPETITIVE FORCES.......................................................... 26
FIGURE 3.2 - PIMS .................................................................................... 40 FIGURE 3.3 - THE SHARE-PROFITABILITY RELATIONSHIP...................... 43 FIGURE 3.4 - FIRM RESOURCE
AND SUSTAINED COMPETITIVE
ADVANTAGE.................................................................... 44 FIGURE 3.5 - STRENGTH, WEAKNESSES, OPPORTUNITIES, THREATS (SWOT) ... 50
FIGURE 3.6- MAIN STRATEGIC DETERMINANTS??????????.?...??. 55 FIGURE 5.1- MAIN STRATEGIC DETERMINANTS IN SOFTWARE INDUSTRY???.?. 86 FIGURE 5.2- INTERLINKS BETWEEN DIFFERENT STRATEGIC DETERMENTS?.....?? 88 FIGURE 5.3-FIRMS FOCUS ON TO HANDLE THE MAIN STRATEGIC DETERMINANTS...? 91
Strategic Determinants in the Software Industry
1.
Introduction
The aim of this chapter is to introduce the thesis to the reader. The first section will give reader a practical understanding of why the topic of this thesis is relevant and interesting. After the background section, the problem statement, purpose, delimitations, target group, reader's guide of the thesis will be discussed.
1.1. Background
Imagine that you are a strategist in a software company. The media is describing your industry as one of fierce competition and rapid technology change. Even time has been changed in your industry. The information technology is one of the most important sectors in European as well as in Swedish economy. The analyst predicts that by 2004, IT will form 6.9 percent of European economy; the growth rate is much slower than the previous decade
(http://www.vnunet.com/News/1138893). That little growth may not to be sufficient for many IT companies to survive without considering specific strategic factors. There is some more shocking news that in 2003 the industry will loose 0.3 percent IT spending (customer) in Europe's (http://www.vnunet.com/News/1138893). However, big software companies are not facing equal problems like small companies. According to that market analysis, big companies like SAP, Oracle, IBM will see growth between 5 to 10 per cent and many software and service firms will go out of business. There has been such an over-investment in software that companies will think twice going
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forward. The pain point for smaller vendors is the cost of marketing (http://www.vnunet.com/News/1138893). In other words, one could say that an information technology year is reduced to one forth of a regular year. The positions of companies are changing accordingly: 86 new companies in the top 500 in Sweden in year 2001. At the same time dozens of others are filing bankruptcy
(http://skolan.presstext.prb.se). The innovation pace is said to be so high that today's new technology might be history tomorrow. Where would you look for a lasting strategic decision? So, there is a little space to find a alternative to give full concentration on firm's strategy.
However, it is generally agreed upon that strategy is influenced by both internal and environmental factors (Hill and Jones, 1989, Byars et al. 1996, deWit and Meyer, 1998; Henderson and Mitchell, 1997; Grant, 1991, 1998; Teece et al., 1997; Spanos and Lioukas, 2001). There has been much debate in the strategy literature which factors are more important in shaping firm's strategy (Henderson and Mitchell, 1997). However, strategy can reveal itself as being determined by environmental factors or internal factors, depending on what is studied. Both perspectives have been studied intensely, and it has been empirically proven that both of them are determinants of performance.
In the literature most researchers are focused on finding the root of causality from either the internal environment or the external environment perspective (Henderson and Mitchell, 1997). Therefore, it is important to balance the argumentation for both perspectives and let the findings decide which perspective is dominating or if the answer is to make a compromise between the two. The firms should
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indemnify the main strategic determinants and should focus on the strategic determinants to be competitive in the industry, which are as Henderson and Mitchell (1997) state: There are very little work that explicitly characterizes the continual, reciprocal nature of the interaction between the environment and the firms within it.
1.2. Problem statement
A problem arises because the external and internal strategic determinants appear to be true at the same time, even though they seem contradictory or even mutually exclusive (de Wit and Meyer, 1998). This is also referred to as a paradox. "A paradox has no real solution, as there is no way to logically integrate the two opposites into an internally consistent understanding of the problem" (de Wit and Meyer, 1998: p.17). The question that remains is whether the strategist should focus either on the external determinants or the internal determinants or choose to focus on both as much as possible at the same time, which will possibly reap benefits of both. The first question is:
• What are the main strategic external and internal determinants
in the software industry?
A natural extension of this question is to ask why a company is highly influenced by strategic determinants. The second question is:
• Why are they the main strategic external and internal
determinants and how they are related?
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Finally, it is interesting to find out what firm should focus on in order to handle the strategic determinants. The third question is:
• What should firms focus on to handle the main strategic
determinants to be competitive in software industry?
With these three questions, the research aims to clarify what drives the strategic choices of organizations in the software industry.
1.3. Purpose
The purpose of this thesis is to find out main strategic determinants, which firms should focus in the software industry.
1.4. Delimitations
Due to time and resource limits of this study, the research concentrates only on the software industry. More specifically, companies that are selling a software product have been chosen, which means that software consultancies are excluded. The main reason for this is that there is a distinct difference between developing and consulting firms, which are involved in software industry. Software companies are selling products, while consulting firms are providing knowledge. However, software firms are involving in different kind of products (e.g. Business, Communications, Games, Graphics, Operating Systems, Programming, Recreation, Utilities), in this study it was not considering to choice of firms, which kind of products are selling. The
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main reason is that all the software companies are mainly technology oriented and it is assumed that type of business will not make any difficulty to identify the main strategic determents.
This thesis is concerning the network level, corporate level, business level and functional level of a corporation. However, the relation between the topic and the specific levels will not be explicitly described. The reason for this is to be found in the nature of the internal environment. The internal environment is applicable to all levels and it is therefore not possible to link the internal environment to one particular level. The organizational culture, for instance, is a part of the internal environment, which is difficult to link to one particular level. The organizational culture, for instance, is influencing the network level when finding the network partners, the corporate level when determining which industries to enter and the functional level as guidelines for employees' behavior.
The strategic determinants are in many ways related to the strategic process. Strategic process can basically be divided into intended and emergent strategies. The main argument for ignoring the discussion of strategic process is that it involves another dimension than the discussion of strategic determinants.
1.5. Target group
The task of this section is to identify who would benefit from reading this thesis. Instead of naming a specific target group the objective is to point out the fundamental requirement that will increase the joy of
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reading it. The central issue of this thesis is strategy. However, this thesis will only reflect and explain a small part of strategy. In order to get most out of this thesis, the reader should be able to place the research within the wider aspect of strategy.
It is expected that the finding of the thesis will help to readers to know about the main strategic determinants in the software industry. It has been expected that software firms, and students of university can be benefited from the finding of the thesis.
1.6. Readers guide
The thesis has been written on some general assumptions. These are-
• The readers have the basic knowledge in the field of business
strategy.
• There are no significant differences between the terms of
strategic factors, forces, elements or actors. However, the term of determinants has been use to understand the relation between the factors.
• The technology is a factor, which belongs to both external and
internal environment, however the technology is considered as firm's internal resource when the technology has only owned by a firm and the overall development of technology has considered as external factors.
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2.
Theory of science and methodology
When doing scientific research, it is crucial to document the basic view of the researchers and their research approach. Both can have a significant impact on the result of a study. The problem is that there is no right way of doing research, however, there are certain rules that can improve the reliability and validity of a study. This chapter aims to present the thinking, reasoning and deciding upon scientific and methodology matters. The reader should keep the view of science and choice of methodology in mind when reading this thesis.
2.1. Research position
The individual perspective of reality is influenced by the way an individual perceives its surroundings. There are probably no two individuals who are identical and therefore each individual perceives and interprets its surroundings, reality, in different ways. The individual perspective of reality is influenced by its beliefs, values and norms (Eriksson and Wiedersheim-Paul, 1999). These values and norms are influenced by upbringing experiences and education etc.. In this way the objective reality turns into subjective understandings. However, there are times when the subjective understandings convert towards the same understandings and therefore build clusters of shared understandings. The basic perspective of this research is that these clusters form what human beings regard as the "truth". In this way reality is socially constructed.
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The definition of a paradigm is closely related to the clusters of truth. "Paradigms represent fundamental ways of viewing and interpreting the reality. Paradigms are webs of explicit or implicit meta-theoretical assumptions shared by a group of theories that bind their work together" (Elfring et al., 1995, p.31). There are two paradigms widely accepted in the philosophy of science: positivism and hermeneutic (Andersen, 1994).
From the positivistic point of view measurability, validation and quantitative methods play a central part in the research work and the paradigm is based on the natural sciences. (Elfring et al., 1995). Positivism is built on the belief that there is an objective reality and scientists should aim to find this true reality and further develop simplified concepts and models to explain this reality. It assumes that social reality is independent and existent. The research work can be done by observation and collection of empirical data, for that reason research results are precise and secure and generate conclusion as laws.
From the hermeneutic point of view paradigms can be translated into science of interpretation. The hermeneutic procedure presupposes that a complete understanding of courses of events is possible by interpreting. The ability to interpret reality depends on the beliefs and values of the subjective and participative investigator.
The fundamental assumption is that beliefs, values and norms of a person are influencing the way that observations are interpreted; that
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suggests to follow a hermeneutic paradigm. Throughout this study different theories underlying the investigation have been considered, which has in fact influenced the data collection. This study aims to stay as objective as possible. Eriksson and Wiedersheim-Paul (1999) calls this limited objectivity, which means that the researcher tries to eliminate sources of subjectivity.
2.2. Research approach
The goal of this thesis is to find out what determines the strategy of firms in the software industry. The problem statement implies both describing and understanding these determinants. In this way this research could be said to be both a descriptive and an explanatory study. The study is descriptive because it will reveal condition, characteristics of the investigated area. However, purely descriptive studies offer no explanation of why the conditions and characteristics occur (Lekvall and Wahlbin, 1993). The goal of an explanatory study is to answer why phenomena occur (Lekvall and Wahlbin, 1993). The combination of descriptive and explanatory study should therefore provide what the phenomena are and why they arose. Closely related to the discussion of how deep and broad a research should be is the choice between case studies and cross section studies. In a case study, the researcher does a detailed and profound study of one single case, unlike cross section study where he studies a few variables in many different cases (Lekvall and Wahlbin, 1993). In this research both fits and it is not purely followed either case study or cross section study. The time dimension of this thesis represents a snapshot of one point in time.
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2.2.1. Deduction vs. Induction There are in general two ways of conducting a research, inductive or deductive. Inductive is when general rules are derived from a particular observation. When conclusion is drawn from logical reasoning based on empirical studies it is said to be a deductive research. The difference is that the former creates the general rule, whilst the latter uses the existing rule to draw final conclusion (Ghauriet al, 1995) (see Figure 2.1).
Figure 2.1 - Deductive and Inductive approach
Theory
Deduction
Reality
Induction
Source: Eriksson and Wiedersheim-Paul, 1999, p. 218
The investigation of this study aims to identify patterns of actions in the collected data. These observations will lead to a theoretically based discussion of the topic - an inductive approach. However, understanding of well-established theories influences both the empirical research and the analysis. It is therefore not a purely
inductive study. The research's approach seems to be more abductive. According to Alvesson and Sköldberg (1994) abduction is when a researcher starts with a problem statement, researches the literature on the topic, does an empirical investigation and finally ends with the theories again.
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2.2.2. Qualitative vs. Quantitative Another fundamental distinction can be made between qualitative and quantitative approaches. Which methodology is used depends on what is ought to be investigated. Qualitative methods are often used when it is not meaningful to express the collected data in numbers. A quantitative method, on the other hand, would imply that the collected data can be expressed in numbers and analyzed with statistic tools (Lekvall and Wahlbin, 1993). There are several reasons to choose qualitative research approach. Firstly, it is our goal to gain a deeper understanding of the topic. According to Kvale and Torhell (1997) the primary task of the qualitative method is to gain a deeper understanding of a phenomenon. Furthermore, the abductive approach is too broad to be kept within the frame of a quantitative survey. Thus there is a probability that respondents are providing information beyond asked questions. Hence, it is difficult to capture the explanations why firms act like they do with a quantitative method. Due to these assumptions a qualitative approach helps to avoid subjectivity. Whereas a quantitative research might be less subjective in the interpretation of the results, it would be very subjective as to what is being asked.
2.3. Research method
The central issue of this section is to document how the investigation is executed. The main task is to gather data. There are two types of data sources, primary and secondary. Primary data is mostly gathered for the specific research. Examples of primary data sources are observation and interviews. Secondary data is collected and compiled
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for other purposes. Examples of secondary data sources are Internet, books, articles and annual reports.
2.3.1. Primary data As mentioned in the research approach section, the goal of this thesis is to describe what the firms are doing and to explain why they are doing it. According to Eriksson and Wiedersheim-Paul (1999), interviews are the best data collection method when the researcher wants to observe the respondent and to get a deeper understanding of a particular topic. Therefore, to collect primary data interviews have been used. However, interviews can be made personal or via other electronic mediums, e.g. telephone, postal or electronic mails (Cooper & Schindler (1998). The greatest advantage of the personal interview lies in the depth and the detail that can be secured. Furthermore, the interviewer has more control than with other kinds of interrogation - it is possible to secure the correct respondent, adjusting the language, show visual materials and observe the interviewee in general (Cooper and Schindler, 1998). Personal interviews were therefore the first choice. However, in one case it was not possible to do a personal interview and therefore a telephone interview was conducted.
Interview
There are three types of interview that can be conducted: structured interview, semi-structured interview, and unstructured interview. In the structured interview researchers emphasize fixed response categories and systematic sampling and loading procedures combined
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with quantitative measures and statistical methods. Unstructured interviews give the respondent almost full liberty to discuss reactions, opinions and behavior on a particular issue. The semi-structured interviews differ from both unstructured and structured interviews. They differ from unstructured interviews because the topics and issues to be covered, and the people to be interviewed and questions to be asked have been determined beforehand, but in a more flexible way than the structured interview (Ghauri & Grønhaug, 2002).
The semi-structured interviews were chosen for this thesis because it enables the observation of new discoveries within the borders of the research topic. Again, it reflects the abductive nature of this thesis. The interview guide is a basic framework for the interviewed questions. The aim was to start a dialogue more than going through the questions step by step.
Since strategy is a vital part of a company's success it was decided to keep all participants anonymous. This turned out to be a wise decision because some of the participants were main competitors to each other.
Sample The software industry is the chosen industry of this thesis. More specific, firms in Sweden that deliver software solutions for other firms based on more or less package software. The main argument for this choice is the limited resources of this research. However, it was considered to keep a balance between big and small films. The main reason behind this choice is to identify the main strategic determinants
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in the software industry without considering the firms resources. Another reason of that choice is that if the balances between two types of companies are not considered the result may not be as proper as expected. Therefore, following criteria were used to find firms to contact:
• Firstly, the companies are divided into two groups. The basic
idea was to compare companies who have an extensive resource base with firms who have a very limited resource base. The criterion used for dividing the companies was number of employees. However, the distinction is a sliding scale and therefore it is of little value to name static numbers that represents one group or the other. Instead the chosen companies who clearly represent the lower or upper half of the scale. It is assumed that a distinct difference is the basis of a good analysis. The goal was therefore to investigate companies with less than 10 employees to represent the limited resource group and companies with more than 500 employees to represent the extensive resource group. However, the numbers of employees of three small companies (S1, S2, S3) are 6, 4, and 6 respectively, which are participated the interviews. It is difficult to find software producers with more than 500 employees in Sweden. Using a list of the 500 biggest IT-companies in Sweden however only 3 companies matched the demands (http://skolan.presstext.prb.se). Of these 3 companies 2 are participating. It is difficult to argue for patterns with only two companies. Therefore, a third company has been included. However, the numbers of the three big companies (B1, B2, B3)
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are 3400, 3200 and 9000 (50 employees in Sweden) worldwide respectively. Although the Swedish subsidiary is answering the questions on behalf themselves and has its own development; there are aspects where the company is viewed as one. Most importantly the customers view the company as the worldwide company and not the Swedish subsidiary.
• Secondly, only the software companies which are involving in
sales and development/production of software products are included in the present study, the main reason behind this choice is that it assume that other type of companies (e.g. consultancy firms) are not effected by the wide aspect (all) of strategic determinants.
• Thirdly, the companies had to compete with a product on the
open market. This criterion was set to make sure that the company had customers and competitors. There might be a risk of getting biased answers from companies without customers and competitors.
• Finally, in order to do personal interviews, the software
companies should be within an acceptable distance.
Selection Upon having sampled a group of possible companies to interview, the companies were contacted by telephone. By explaining the purpose of this thesis persons have been connected who could answer asked
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questions. The position of the persons varied among the companies. It is therefore not possible to select one position that should have fitted all companies. It was assumed that the employees of the companies know if they are able to answer the asked questions. Moreover, it was emanated that the difference in position has a negative impact on the result. All participants have been working with the company over a long period and through their experience within the company they had gained the necessary knowledge to answer the questions.
It is always difficult to determine the number of interviews necessary to attain validity. Through telephone conversation with the software companies an impression was received that the first response on the research area was very similar. This impression turned out correct. The interviewee's had very similar answers the questions. The tendencies and patterns in the answers therefore suggested that further investigations could be stopped. This corresponds to Ghauri and Grønhaug (2002) who argue that the researcher continues the procedure until no new opinions are uncovered. In qualitative research the purpose is to understand, gain insights and create explanations (Ghauri and Grønhaug, 2002). All in all six interviews have been conducted in six different companies. It is more important to get variety in the group of companies rather than many interviews in one company. Furthermore, the process of finding the most suitable person in the companies would imply that if other persons in the company would have been interviewed, they might not have been as capable as the primary person. This could lead to misleading results. Moreover, it was a concern that the position of the interviewee' is a crucial issue for the topic of this thesis. All the six interviewees are working in the top
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position in their company, who are familiar with the strategic matters. The working position of these interviewees (when the interviews ware conducted) were product director, professional service division manager, chief of administration in three big companies and the interviewees' position in the small companies were CEO, managing director, and CEO -chairman of the board.
Execution All respondents received a very short description of the investigation and the interview guide at least one day before the interview. The supervisor of this thesis approved the interview guide before sending it to the companies. To avoid leading the respondents, intentionally the research area was not explained in depth and, as mentioned before, the interview guide was not very detailed. It was assumed that the quality of the responses would improve if the respondent would receive both beforehand.
All interviews but one telephone interview were held in conference rooms. All interviews lasted between 30 minutes and 80 minutes. Before starting the interview it was assured that the interviewee and the interview would be held confidential. Additionally the respondent was informed that the interview would be recorded on a micro cassette recorder. Recording the interview gives the possibility to concentrate on the topic and the dynamics of the interview (Kvale, 1996). "The words and their tone, pauses, an the like, are recorded in a permanent form that can be returned to again and again for re-listening, however, It does not include the visual aspects of the situation, neither the
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setting nor the facial and bodily expressions of the participants" (Kvale, 1996, p.160-161). Furthermore, it is difficult to make sure that the recording is audible. Mumbling or background noise like traffic coffee cups and the like hitting the table could make post recording transcription difficult. To avoid these pitfalls, notes have been taken in addition to the micro cassette recording. In order to analyze the interviews the taped interviews were transcribed into written texts.
All interviews were conducted in English, but all respondents were Swedish. There is a risk that language barriers might distort some of the messages of respondent. However, all respondents gave no impression of having difficulties expressing themselves and their ideas.
The interviews started asking easy and formal questions to the respondent. The respondents were deliberately not informed in depth about the research area until the end of the interview. This choice was made to influence the respondent as little as possible. During the interview it is important not to lead the respondent. It might be that formulation and the tone of the interviewer influences the respondent. The questions were therefore often asked from different angles. It was decided that one person did all the interviews while the other took notes and made sure that the interviewer did not forget important aspects. As the interview moved along, the questions gradually became more complicated. The purpose of this procedure is to develop a confidence and understanding between the interviewers and respondent before going into the more complicated matters.
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At the end of the interview the respondent was informed about the research in detail, which often lead to further discussion. However, none of the respondents did change their statements.
2.3.2. Secondary data Secondary data can be collected in a number of different ways. Regardless what kind of source is used it is very important to consider precision, validity, reliability and relevance of the data in relation to the purpose and problem statements of the research (Lundahl and Skärvad, 1999). The majority of secondary data was collected through books, often from libraries and articles from public databases. The use of the Internet as a source is dramatically increasing, but it is difficult to establish validity and reliability of Internet pages and the source of data should therefore be examined carefully.
2.3.3. Reliability and Validity The previous sections should have introduced the reader to the underlying scientific assumption and the conduction of this study. This final section will concern the reliability and validity of the investigation. It is important to emphasize that the reliability and validity is not a final verification of the investigation. Reliability and validity has been built into the research with continual checks on both. Reliability A study with high reliability is recognized by the fact that the research findings can be replicated. A problem arises because qualitative
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research is highly contextual, meaning that information gathering is a function of who gives it and how skilled the researcher is at getting it. Furthermore, the world is in constant flow, which makes it impossible to repeat the exact same investigation twice. Therefore, the term reliability in the traditional sense seems to be something of a misfit when applied to qualitative research (Merriam, 1998). To avoid this Merriam (1998, p.206) suggests that "Rather than demanding that outsiders get the same results, a researcher wises outsider to concur that, given the data collected, the results make sense. The question then is not whether findings will found again but whether the results are consistent with the data collected." By describing in detail how the data was collected (Chapter 2), explaining the view on the underlying theories for analysis (Chapter 5) and presenting the empirical data (Chapter 4) the reader should be able to judge whether the results (Chapter 5 and 6) are consistent with the data collected. Research findings can be repeatedly wrong. Merriam (1998, p.205206) gives the following example of the relationship between reliability and validity: "A thermometer may repeatedly record boiling water at 85 degrees Fahrenheit (app. 30 degrees Celsius, red.); it is very reliable since the measurement is consistent, but not at all valid." This leads to the next section on validity.
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Validity Internal validity Kvale (1996) states that "validity refers to the truth and correctness of a statement" (p.236) and that "validity pertains to the degree that a method investigates what it is intended to investigate" (p.238).
Throughout the sections on primary and secondary data collection it has been documented how the research was done. The reasons for the research will therefore not be repeated here. It should be emphasized that the research procedure was not coincidental but follows research methods found in generally accepted literature on research studies. By doing so, this study has gained high internal validity.
External validity According to Merriam (1998, p.207) "external validity is concerned with the extent to which the findings of one study can be applied to other situations." The task is to find out whether the results of a study are generable (Kvale, 1996, Merriam, 1998). Internal validity is a prerequisite for external validity. "There is no point in asking whether meaningless information has any general applicability" (Guba and Lincoln in Merriam, 1998, p.207).
The sampling, selection and execution of this study shows that the aim of this thesis is not to provide statistically valid result. The sampling and selection of participants is non-random and the number of interviews too low. The reason for this decision lies in the previous
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Strategic Determinants in the Software Industry
mentioned goal of gaining a deeper understanding of a specific sample. In other words this study does not claim to find out what is generally applicable in the software industry. Merriam (1998, p. 1998) argues, "In qualitative research, a small non-random sample is selected precisely because the researcher wishes to understand the particular in depth, not to find out what is generally true of the many." However, this does not imply that the result is of no general use. Firms who are similar to the ones in the sample might very well gain insight by reading the result.
The results might be widely acceptable through analytical generalization. "Analytical generalization involves a reasoned judgment about the extent to which the findings from one study can be used as a guide to what might occur in another situation. It is based on an analysis of the similarities and differences of the two situations. By specifying the supporting evidence and making the arguments explicit, the researcher can allow readers to judge the soundness of the generalization claim. This is also referred to as assertational logic" (Kvale, 1996, p.233). As mentioned in "reliability" section, the first paragraph of this thesis aims to give the reader a result that makes sense, based on the data collected. This should also provide a basis for future analysis of similarities.
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Strategic Determinants in the Software Industry
3.
Frame of reference
In deciding an organization's future strategy the strategist must analyze the organization's external and internal environment (Hill and Jones, 1989; Byars et al., 1996; Grant, 1998; Johnson and Scholes, 1999). A prerequisite for analyzing the external and internal environment is to know what the external and internal environment is. The literature on both environments is exhaustive. Therefore, the main aim of the following descriptions is more to present the main areas of concern in both environments than giving a detailed description of them. It would, however, be difficult to understand the environments without any explanation, which is why some dominating views are presented. Section 3.1 and 3.2 will introduce the reader to what is considered being the external and internal environment and why a firm focuses on one environment or both. The goal of this chapter is to present a balanced view on the external and internal environment as a source of superior performance.
3.1. The external environment
In order to analyze the external environment as a source of superior performance it is valuable to understand what the external environment is. Hence, it will start with a description of the different levels of the external environment. However, every company interprets the external environment in their own individual way (Byars et al.,1996; Johnson and Scholes, 1999).
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Strategic Determinants in the Software Industry
3.1.1. Macro environment The macro environment includes general forces that are felt in many industries (Hill and Jones, 1989). These can be classified as political, economic, social cultural, and technological (Byars et al.,1996; Johnson and Scholes, 1999). The analysis of these forces is often referred to as PEST analysis. Hill and Jones (1989) and Grant (1998) add demographic and global factors to the PEST analysis. Some examples of political forces are hiring and firing of employees, compensation, working hours, and working conditions. Laws can influence advertising practices, the pricing of products, and corporate growth by mergers and acquisitions. Taxes directly influence the financial structure and investment decisions of organizations (Byars et al. 1996).
The local, national, and world economic forces can influence business in many ways. Byars et al. (1996) argue that it is important to make a separate assessment based on organizational scope. Examples of local economies are wage rates, unemployment, disposable income. On the national level, trends in growth, income levels, inflation, balance of payments can influence the earnings of an organization. On the other hand, international economy can be dividend into different categories of nations with similar economic situation. A good example of how economics of the macro environment can affect business is the burst of the so-called "it-bubble" around the millennium. As the stock market for information technology started to drop rapidly, so did the economy throughout the world.
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Strategic Determinants in the Software Industry
Values, attitudes of customers are social forces. These forces have a significant influence on the demand of a product or service. Due to this fact they are valuable to consider when deciding a strategy.
Technology includes not only inventions that revolutionizes live but also the slow improvements in methods, in materials, in design, in application, in diffusion into new industries, and in efficiency (Argenti in Byars et al., 1996).
Demographic changes refer to the change in population. Some organizations might be very dependent on the size of the population, such as health care and educational institutions.
Changes in the global environment can have an immense impact on the both local and international markets.
The task of a firm is to forecast these forces. It should be noted that the nature of these forces is so complex that it is impossible to make an exact prediction. The task is therefore more to get a basic understanding of what is driving the change of the forces and how they affect the organization (Johnson and Scholes, 1999).
3.1.2. Industry The analysis of the macro environment should give a basic understanding of the broad aspects of the environment. The next level of analysis is the industry. An industry is defined as a group of firms
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Strategic Determinants in the Software Industry
offering similar products or services (Hill and Jones, 1989; de Wit and Meyer, 1998).
According to Grant (1998), the structure of the industry determines the attractiveness of an industry. Therefore, the task facing the strategic managers is to analyze competitive forces in the industry environment (Hill and Jones, 1989). In practice there are many factors of an industry that influences competition and the level of profitability. Porter, however, has developed a widely used framework that enables managers to do this (Grant, 1998). This framework is known as the Five Forces of Competition. The five forces of competition are new entrants, buyers, suppliers, substitutes, and rivalry (see Figure 3.1).
Figure 3.1 - Five Competitive Forces
New entrants
Threat of New Entrants
Suppliers
Bargaining Power of Suppliers
Industry Competitors
Bargaining Power of Buyers
Buyers
Rivalry
Threat of Substitutes
Substitutes
Source: Porter, 1985.
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Strategic Determinants in the Software Industry
New entrants to a market is an threat for existing companies, because most commonly they bring a new production capacity, they desire to establish a secure place in the market, and sometimes they also have substantial resources to compete. New entrants have significant influence on price-costs-profitability (Porter, 1985). New entrants are not only a threat to firms in an industry but also have a possibility that affects competition. Theoretically, any firm is free to entry and exit in an industry. However, when firms are able to high profitability in an industry, they usually inhibit additional rivals from entering the market (Rue and Holland, 1986). Entry barriers are unique industry characteristics. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage.
The number of potential buyers (customers and consumers) as well as their needs, tastes, and preferences are major source of threats and opportunities in the competitive environment (Rue and Holland, 1986). The power of buyers is the impact that customers have on a producing industry. There is a significant relationship between buyers and markets, when buyer power is strong the market becomes a "monophony" - a market in which there are many suppliers and one buyer. Whether seller-buyer relationships represent a weak or strong competitive force depends on bargaining leverage and price sensitivity. Buyers have substantial bargaining leverage when buyers are large and purchase a sizable percentage of the industry's output.
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Strategic Determinants in the Software Industry
Typically, purchasing in large quantities gives a buyer enough leverage to obtain price concessions and other favorable terms.
A producing industry requires raw materials, labor, components, and other supplies. When suppliers are powerful, they can influence on the producing industry, such as selling its raw materials at a high price expropriating some of the industry's profits. The ability of suppliers to influence price or quantity on an industry, supplier is a key variable in the competitive sector (Rue and Holland, 1986).
According to Porter's five forces of competition framework, substitute products refer to products in other industries the threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A close substitute product constrains the ability of firms in an industry to raise prices. Firms in one industry are quite often in close competition with firms in another industry because their respective products are good substitutes (Thompson and Strickland, 2001). The competition engendered by a threat of substitute comes from products outside the industry.
An industry is a group of organizations producing same types of products or services, they contend in battle with each other for market share and that is called rivalry. Rivalry is usually makes in price wars, advertising barrages, and product proliferation. Rivalry is costly for the firms but consumers could be beneficial because they get better prices, more products or service information, and more product variety (Rue and Holland, 1986). In some industries, cross-company
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Strategic Determinants in the Software Industry
rivalry is centered on price competition to offer buyers/consumers the best (lowest) price. (Thompson and Strickland, 2001). Before leaving the industry environment it should be mentioned that Porter's Five Forces of Competition framework is not without its critics. However, the critics are mainly focusing on the assumptions lying behind the model and not on the five forces them selves, one such is that Porter sees all business interactions as competition. Adam Brandenburger and Barry Nalebuff, in their book called "coopetition", introduced duality of competitive/cooperative of business relations (Grant, 1998). The new player was called a complementor. "A complementor is the mirror image of a competitor. On the demand side, they increase the buyers' willingness to pay for product; on the supply side they decrease the price that suppliers require for their inputs "(Ghemawat, 2001). Since the other theories are not expanding the factors presented in Porter's Five Forces Framework they will be presented in the section on superior performance in the external environment.
3.1.3. Market segmentation According to Grant (1998) and Porter (1985) it is useful to partition an industry into segments if the nature and intensity of competition varies among the different sub-markets that an industry serves. This is referred to as market segmentation. "In the business world a market is usually defined as a group of customers with similar needs" (de Wit and Meyer, 1998, p. 334). market is defined as An essential step of segmentation is to determine the basis of segmentation. Segment
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Strategic Determinants in the Software Industry
decisions are essentially choices about products and customers. The question is what characteristics of the buyers or of products that makes the most distinctly partition of the market (Grant, 1998). Porter (1985) states that profitability of the market segment is influenced by the same forces as those of the industry as a whole. The five forces model can therefore by applied to the market as well. There are, however, a few differences. First, there are differences when analyzing the pressure of competition from substitute products in a market. In markets not only the substitutes from other industries, but more importantly, substitutes from other segments are taken into consideration. Second, the majority of new entrants will be from other segments within the same industry. As in the strategic group analysis, mobility barriers hinder a switch from one market segment to another to mobility.
3.1.4. Strategic group The boundaries of an industry are often very broadly defined (Grant, 1998). Therefore, it might be that a company theoretically can exist in more than one industry. Looking at what industry a firm is operating in will therefore turn out little fruitful. In such cases it can be useful to identify organizations with similar strategic characteristics, following similar strategies or competing on similar bases. This is referred to as strategic group analysis. A strategic analysis can help identify the immediate competitors and what they are focusing on. Some strategic groups have positional advantages in Porters five forces framework (see section Industry). These strategic groups could then be viewed as desirable goals for non-group members. The problem is that firms
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Strategic Determinants in the Software Industry
who are switching strategic group often face costly barriers to mobility (Hill and Jones, 1989).
Whereas an analysis of the external environment should provide information about the competitors and what the customers want, an analysis of the internal environment should clarify what the firm is and what it is able to do.
3.2. The internal environment
The internal environment is the firm's internal resources, capabilities/competences, which are the strength of a firm (Johnson and Scholes, 1999). Before describing the internal environment there are a couple of views that should be taken in consideration:
Firstly, the literature on which parts of the internal environment that influences the strategy is rather convergent. Basically it can be divided into three parts; Strategy -firms' purpose, Resources / Capabilities / Competences, Structure and Systems (Hill and Jones, 1989; Grant, 1998; Johnson and Scholes, 1999). The order of appearance between the internal environment and strategy formulation, however, differs in the literature. While it is basically agreed upon that the strategy formulation is based on organizational goals and a rational analysis of external environment and internal resources and capabilities, it is discussed when to take the structure and systems into account (Grant, 1998). One view is that structure follows strategy. Once formulated, the next step is to choose an appropriate structure and tailored systems (Hill and Jones, 1989). Another view is that structure and systems
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Strategic Determinants in the Software Industry
should be taken into account when analyzing the resources and capabilities (Grant, 1998). Backed up by the exhaustive literature on the difficulties of organizational change this is correct as assumed. Therefore, the structure and systems can be categorized as a part of the intangible resources of a firm.
Secondly, even though there is a wide research on resources, capabilities, there seems to be no general accepted way of how to distinguish them (de Wit and Meyer, 1998). Some authors say that resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. (Barney 1991; de Wit and Meyer, 1998). Others, like Grant (1998), argue that resources should be divided from capabilities and competences. For these authors resources are not productive on their own. It is the capabilities, which are interaction between resources that makes them productive (Grant, 1998). Johnson and Scholes (1999) agree with Grant (1998) that the resources are not productive on their own, but what Grant (1998) calls capabilities, is called competences by Johnson and Scholes (1999). According to Prahalad and Hamel in Grant (1998, p: 118) the literature uses the terms "capability" and "competence" interchangeably. Both capabilities and competences will be
represented in the following. However, it is very logical to make a distinction between what is not productive by itself and what is a direct capacity for undertaking productive activity. This section will therefore be dividend into resources and capabilities/competences.
Finally, analyzing the internal environment is not only considered as a task of looking at what is inside the firm, but to look at what can be
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Strategic Determinants in the Software Industry
controlled by the firm. A good example of this is the relationship with other firms. A relationship does not belong to one firm. It is dependent on all participants of the relationship. However, in most cases, the firm can control whether or not it should continue the relationship, i.e. directly control.
3.2.1. Strategy - firms' purpose According to de Wit and Meyer (1998) strategy is a course of action for achieving an organization's purpose. The purpose expresses the reason why an organization exists. Purpose can be expressed through mission, vision, and goals statements. Fundamentally, the purpose of a firm can be divided into two: shareholder and stakeholder.
3.2.2. Resources The resources are the own individual resources of a firm. These resources are often not able to be productive on their on. It is usually the combination of resources that makes them productive. The resources can be divided into tangible, intangible, and human resources (Grant, 1998; Johnson and Scholes, 1999).
Tangible resources Tangible resources can generally be dividend into financial and physical resources (Grant, 1998). Examples of physical resources are buildings, machines, and production capacity. Financial resources include sources and use of money, such as obtaining capital managing
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Strategic Determinants in the Software Industry
cash, the control of debtors and creditors, and the management of relationships with suppliers of money (Johnson and Scholes, 1999). These resources are the easiest to identify and evaluate because they are usually listed in the firm's financial statements (Grant, 1998). However, to do an assessment of the physical resources the firm must look beyond the mere listing of buildings, machines, and production capacity. Questions about where the resources located, what their capacities are, the age and type of equipment can determine how useful a physical resource really is (Johnson and Scholes, 1999; Grant, 1998). Furthermore, it might be that some physical resources have historical value that goes beyond what is listed, such as an old movie library etc.
Human resources "From a resource-based view, human resources are the productive services human beings offer the firm in terms of their skills, knowledge, and reasoning and decision-making abilities" (Grant, 1998: p. 116). In other words, of course human beings are tangible just like buildings and machines, but it is not the tangible functions that are important for the firm. That means that the human resources can be classified as tangible and intangible of a firm. The best way of increasing the value of the human resources is by education and training.
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Strategic Determinants in the Software Industry
Intangible resources The intangible resources are more difficult to identify than the tangible resources. Nevertheless, intangibles are playing a crucial role of a companies value. The gaps between the book value and the stock market value are a clear evidence of this. Companies with the highest valuation ratios tend to be technology-based companies and companies with very strong brand names (Grant, 1998). The main problem is to find the "real" value of the intangible resources.
Reputation is an intangible asset because it creates confidence in customers and suppliers. Brand value, for instance, is a reputation asset. Consumers chose a branded product over an unbranded or unknown brand (Grant, 1998). The reputation can also be linked to the company itself.
Technology is another important category of the intangible resources is technology (Grant, 1998). Technology can be grouped in proprietary technology and expertise in the application of technology (Grant, 1998). Proprietary technology is patents, copyrights, etc. and is protected by law. The expertise in the application of technology is also referred to as company-owned know-how. Relationships with customers, competitors, or suppliers are intangible resources that have gotten increased attention during the past decade. Exhaustive literature on customer relationship management, coopetition, and supply chain management has proven the impact of these resources on firm performance.
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Strategic Determinants in the Software Industry
The ability of employees to harmonize their work efforts and integrate their separate skills may depend not only on the interpersonal skills but also the organizational context. This organizational context is also referred to as the organizational culture, which can be the values, traditions and social norms or an organization (Grant, 1998).
As mentioned above it is valuable to take the structure of the organization into account before deciding upon a strategy. The different combinations of structures will not be presented here. The important message is that different structures might be more or less appropriate for different kinds of organizations. An example of conflict is if the structure of the organization is suitable for simple tasks, whereas the strategy of the organization is demanding complex tasks.
3.2.3. Capabilities/competences Resources are usually not able to be productive on their own, i.e. adding value to the customer single-handed. It is deployment of resources into capability or competences that makes them capable of undertaking a particular productive activity.
3.3. Sources of superior performance
After having taken a look at what the external and internal environment it is time to take a closer look at which parts of the
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Strategic Determinants in the Software Industry
environments are sources of superior performance1. Fundamentally there are two ways of attaining this goal. First, a company may locate in a context where favorable conditions result in higher profitability. Analysis of the macro environment and Porter's Five Forces of Competition framework can be used to identify such a context. Second, a firm may seek to establish a position of competitive advantage for the firm. Sustainable competitive advantage is a central source of superior performance (Coyne, 1986, Grant, 1998). However, to find the sources of sustainable competitive advantage, it should be defined what it is. Grant (1998, p.174) defines competitive advantage as:
"When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit)".
There are three conditions that have to be met in order for competitive advantage to be meaningful (Coyne, 1986):
• The customers perceive a consistent difference in important
attributes between the producer's product or service and those of his competitors.
• The difference is the direct consequence of a capability gap
between the product and his competitors.
1
Performance as profits that can be traded into profitability, investments in 37
market share or technology, customer satisfaction, employee benefits, etc.
Strategic Determinants in the Software Industry
• The difference in important attributes and the capability gap
can be expected to endure over time. Basically, there are two types of competitive advantage that a firm can possess: low cost or differentiation (Porter, 1985). Delivering the same product or service at lower cost can is referred to as low cost advantage. Differentiation advantage is obtained if the customer is willing to pay a premium price that exceeds the cost of differentiation.
The question is whether firms can attain superior performance by analyzing the external environment, analyzing the internal environment or both. The following sections on the external environment and internal environment will take a closer look at which environment is a potential source of superior performance.
3.3.1. The external environment Companies that are adopting an external environment perspective should continuously take their environment as starting point when determining their strategy (de Wit and Meyer, 1998).
Macro environmental factors are influencing the level of demand within an industry and are therefore directly affecting company profits (Hill and Jones, 1989). As these factors change the strategic management must understand the impact on their company and the opportunities and threats it faces. The macro environment is affecting the performance of the company. The problem is that the macro environment is very broad and it would therefore be very expensive to
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Strategic Determinants in the Software Industry
do an extensive analysis. However, by focusing on an industry or market segment a firm can narrow the scope and determine which of the macro-level influences are important for the firm (Grant, 1998).
Five forces of competition According to Porter (1985), the fundamental determinant of a firm's profitability is industry attractiveness. Porter's five forces of competition are based on the economic research in the field of industrial organization (IO) (Ghemawat, 2001). This research explored the structural reasons why some industries were more profitable than others. By analyzing the five forces of competition a firm could determine the attractiveness of an industry. The five forces influence profitability because they influence price, costs and required investment of firms in an industry. A firm can shape the industry structure and is therefore not a prisoner of its industry's structure. The task of a firm is therefore not only to pick the right industry and understand the five forces better than competitors (Porter, 1985).
Market orientation "Market-oriented businesses are committed to understanding both the expressed and latent needs of their customers, to sharing this understanding broadly throughout the organization, and to
coordinating all activities of the business to create superior customer value" (Slater and Narver, 1999, p. 1167) . Market orientation is continuously scanning the market for sources of superior performance.
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Strategic Determinants in the Software Industry
In addition to the customer orientation a market oriented firm must also be competitor oriented. "Competitor orientation means that a seller understands the short-term strengths and weaknesses and longterm capabilities and strategies of both the key current and the key potential competitors" (Narver and Slater, 1990, p.22).
Finally, it should be noted that the "market orientation concept is focusing on the internal environment as the primary source of success (Kohli and Jaworski, 1990; Slater and Narver, 1999). When a firm follow the market orientation that also means the firm focus on external environment in this point of view.
PIMS A very different perspective on how to gain competitive advantage is the observed relation between market share and profitability. Market share and profitability are deeply interconnected and there have significant relation between these two things (see Figure 3.2).
Figure 3.2 - PIMS
Return on investment (ROI)
Relative Market Share (RMS)
Source: Own based on Buzzell and Gale, 1988 40
Strategic Determinants in the Software Industry
Researchers found this relationship may different in considering different kind of industries, different time periods, and as well as various parts of the world (Buzzell and Gale, 1988). Having a large market share, an organization can get some extra benefits to control over market and they are able to provide better value and realizing lower costs to its customers. "Under most circumstances, enterprises that have achieved a large share of the markets they serve are considerably more profitable than their smaller-share rivals" (Buzzell and Gale 1988, p.367). According to Buzzell and Gale (1988), the PIMS database is the world's most extensive and detailed source of information. They argue that, major companies like IBM, Gillette, Kellogg, and Coca-Cola, are enjoying strong competitive positions in their primary product markets and these are highly profitable. According to them, there are mainly four possible reasons to have a link between market share and profitability.
First reason is the Economics of scale. If an organization has a large market share it can achieve "achieved economies of scale in procurement, manufacturing, marketing, R & D, and other cost components"(Buzzell and Gale 1988, p.369). And that is also help to achieve more efficient methods of operation within a particular type of technology. According to Porter ( in Buzzell and Gale, 1988) shareprofitability relationship is 'U-shaped' (high on both ends and low in the middle) in most of the industries. The small and large share business typically earn high rates of return but the medium-share business are fail to get such advantages, he called as 'stuck in the middle' (Buzzell and Gale,1988, p.373).
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Strategic Determinants in the Software Industry
The second reason is "Risk aversion" by customers. A achieved market leadership position, risk-averse buyers may favor its products because they don't want to take the chances sometimes associated with buying from a smaller-share competitor. This type of customer behavior can also help an organization to be more profitable.
The third reason is "Market power". If an organization have large market share that also means that somehow it have the control over the market. Their size permits them to bargain more effectively, administer prices, and in the end, realize significant higher prices for a particular product.
The fourth reason is "a common underlying factor". Large market share also helps a organization to achieve the quality of management. If an organization has skillful managers that also means that the have the skill in controlling costs, getting maximum productivity from employees.
These all are not always active in all industries together; but according to the PIMS logic, an organization starts its business from quality and in the long run, it achieves low cost position.
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Strategic Determinants in the Software Industry
Figure 3.3 - The Share-Profitability Relationship
Superior relative quality Premium Prices + Market Share Scale and/or Experience cost Higher Profitability
Source: Own based on Buzzell and Gale, 1987.
The large market share also helps the organization to get the benefit of "oligopolistic coordination". That means that other existing organization is not able to fight with that organization that has large market share. The organization can get the power over quality of product, price and that also provide a higher rates of return than are typical in competitive markets. (Buzzell and Gale, 1988, p.336). The PIMS research also show that share is more important in stable markets than it is in unstable markets especially it is more important in high-tech industries. Software industry depends on R & D and marketing. Besides the external focus by be the PIMS database there also on inevitable internal development as well. That means that a company has to regard the development in their resources to gain the market share in the long run.
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Strategic Determinants in the Software Industry
3.3.2. The internal environment Companies that are adopting an internal environment perspective should not be built around external opportunities, but around a company's strengths (de Wit and Meyer, 1998). The following part provides a closer look at the arguments for why the internal environment is the source of sustainable competitive advantage.
Resources The criteria of firm resources to achieve sustained competitive advantage are shown in Figure 3.4.
Figure 3.4 - Firm Resource and sustained competitive advantage
Firm Resource Heterogeneity Firm Resource Immobility
Valuable Rare Imperfect Immutability Substitutability
Sustained Competitive Advantage
Source: Barney, 1991.
The first criteria for resources to be sources of sustained competitive advantage are heterogeneity and immobility. In an industry where firms posses exactly the same resources they would all be able to pursue the same competitive strategy. According to Barney (1991) it is not possible for firms to enjoy a sustained competitive advantage in such an industry. In order to have sustainable competitive advantage the resources therefore have to be heterogeneous. Heterogeneity,
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Strategic Determinants in the Software Industry
however, is obsolete if the resources easily can be transferred from one firm to another. If firm resources are perfectly mobile, then other firms can easily acquire any resources that allow some firms to implement a superior strategy. Again, it would suggest that a firm couldn't achieve sustainable competitive advantage. Therefore the two first criteria of sustainable competitive advantage are that the resources are heterogeneous and immobile. Under the assumption that resources are heterogeneous and immobile there are still four criteria that have to be fulfilled before a resource can be said to be sustainable:
• The first criterion is that the resource is valuable. The resources
can are valuable only if they are directly linked to one or more of the key success factors within an industry (Grant, 1998). Barney (1991) defines valuable resources as resources that exploit strength or neutralize threats.
• The second criterion is that the resource has to be rare. If a
resource is widely available to firms within an industry then each of these firms have the capability of exploiting that resource in the same way, thereby implementing a common strategy that gives no one firm a competitive advantage (Barney, 1991; Grant, 1998).
• That resources have to be imperfectly imitable is the third
criterion. Resources are sustainable competitive advantages if the competitors who do not possess them cannot easily obtain them. According to Barney (1991) there are three reasons why
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Strategic Determinants in the Software Industry
firm resources can be imperfectly. Firstly, unique historical conditions. Secondly, causally ambiguous. Causally ambiguity exists when the link between the resources controlled by a firm and a firm's sustained competitive advantage is not understood or understood only very imperfectly. Thirdly, socially complex. Maybe the resources are complex social phenomena that cannot be systematically managed or influenced by the firm.
• The fourth and last criterion for a resource to be imperfectly
imitable is that there are no strategically equivalent valuable resources that are themselves either not rare or imitable.
The above mentioned criteria for resources in order to be a source of sustainable competitive advantage have implicitly touched the subject of durability of resources. Sustainable refers to the fact that competitors cannot replicate the strategy. This does not mean that they "last forever" (Barney, 1991). Nevertheless, it is important to consider the durability of resources (Grant, 1998). Some resources might last longer than others. Reputation and Corporate culture are examples of long lasting resources. Other resources, like Technological patents, might be obsolete at the time it has gotten legal support.
Capabilities/Competences As mentioned above it is the combination of resources that makes them productive. The question is how the firm deploys its resources.
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Strategic Determinants in the Software Industry
Stalk et al. (1992: p. 62) argue that "in a world characterized by durable products, stable customer needs, well-defined national and regional markets, and clearly identified competitors, competition was a "war of position" in which companies occupied competitive space like squares on a chess board, building and defending market share in clearly defined product or market segments." However, this has changed and it has become more difficult and less valuable to position yourself. When product life cycles accelerate it is the ability to create new product and exploit them quickly that counts (Stalk et al., 1992). In addition to the acceleration of the product life cycles there is globalization, which breaks down barriers between national and regional markets and competitors are multiplying. In this business environment competition is a "war of movement" rather than a "war of position" (Stalk et al., 1992). The firm, therefore, has to focus less on products and markets and rather on dynamics of its own behavior. The goal is to identify and develop the hard-to-imitate organizational capabilities that distinguish a company from its competitors. According to Stalk et al. (1992: p.63) the five principles of capabilities-based competition are:
• Speed. The ability to respond to quickly to customer or market
demands and to incorporate new ideas and technologies quickly into products.
• Consistency. The ability to produce a product that unfailingly
satisfies customers' expectations.
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Strategic Determinants in the Software Industry
• Acuity. The ability to see the competitive environment clearly
and thus to anticipate and respond to customers' evolving needs and wants.
• Agility. The ability to adapt simultaneously to many different
business environments.
• Innovativeness. The ability to generate new ideas and to
combine existing elements to create new sources of value.
Summarized these five principles state that a company has to show responsiveness and innovation. This concept matches the concept of "dynamic capabilities", where "firms can show demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively coordinate and redeploys resources". (Teece et al., 1997, p. 515). Prahalad and
Hamel (1990) are stating the same argument when describing what "core competences" are: "The critical task is to create an organization capable of infusing products with irresistible functionality or creating products that customer need but have not yet even imagined". By stating that "the future is now" Hamel and Prahalad (1994) claim that tools of segmentation analysis, industry structure analysis, and value chain analysis are worthless in a non-existing market, i.e. the future market. Therefore, the firms should build core competences long before a precise form and structure of future markets comes completely into view (Hamel and Prahalad, 1994).
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Barlett and Goshal (1994) argue that management should move from strategy, structure, and systems to purpose, process, and people. The idea is that people are only willing to do their best for organizations with which they can identify. Each employee should be given a maximum of freedom only guided by a broad formulated purpose. One can in many ways compare this way of thinking with the basic idea of religion. "Purpose - not strategy - is the reason an organization exists" (Barlett and Goshal, 1994, p.88).
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3.4. Discussion
In the previous chapter the external and internal environment and why both are considered sources of superior performance was presented. In the following the reflections on the topic are presented.
3.4.1. Turning the inside out The Strength Weaknesses Opportunities Threat (SWOT) analysis has often been linked to the external and internal environment (Grant, 1998). Barney (1991) state that strength and weaknesses are internal related while the opportunities are related to the external environment (see Figure 3.5).
Figure 3.5 - Strength, Weaknesses, Opportunities, Threats (SWOT)
Internal Analysis
External Analysis
Strengths
Opportunities
Weaknesses
Threats
RESOURCE BASED MODEL
ENVIRONMENTAL MODEL
Source: Barney, 1991
Reading the chapter on sustainable competitive advantage one could question what is the most preferable- external orientation or internal?
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Maybe the internal environment is more suitable to argue for future opportunities and threats than the external environment. In this way you could state the role of the internal environment has turned inside out.
3.4.2. The paradox As the reader has noticed there are arguments for being both internal environment and external environment oriented when determining a strategy. Actually the internal environment and the external environment constitute the two sides of the same coin (Spanos and Lioukas, 2001). Both the external and the internal environment are influencing profitability (Spanos and Lioukas). This presentation of the different theories only reflects the point of departure. All theories are realizing that a firm has to take both environments into account, however, at different times. Porter, for instance, states that taking a closer look at a firm's value chain can only attain a competition advantage. The question is why can a firm then not focus on both at the same time?
Lets assume a company decides to focus on both the internal and the external environment. Already at the "fit through" the firm has to face the paradox of being both external and internal environment oriented. Adaptation to and of the external environment at the same time is only possible if the external environment "fits" perfectly with the internal environment. However, it is a very rare phenomenon. In most cases there will be a "misfit" between the external and the internal environment in a same time. The internal environment may not
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correspond the necessary resources and capabilities/competences of the external environment. There are two ways this could happen. Firstly, the resources and capabilities/competences are not developed enough to cover all the requirements of a particular market or industry. Secondly, the resources and capabilities/competences might exceed the requirement of a particular market or industry. In case of a "misfit" the firm most decide whether to follow the internal environment or the external environment. Is it better to find a market that fits your resources and capabilities/competences or should you develop your resources and capabilities/competences to meet the most attractive market position?
From a pessimistic point of view both path might lead to failure. If you decide to focus on a particular position in a market of constant flux there is a risk that your advantageous position has diminished by the time you have developed the necessary resources. On the other hand if you decide to focus on your internal environment there might be a risk that there is no market "fitting" your resources and capabilities/competences. However, if you decide to compromise you will be neither optimizing the use of resources nor will you be in the most attractive market position.
Some authors argue that the answer is to build strategic flexibility (Hitt et al., 1998). Strategic flexibility is the ability of a company to adjust quickly to environmental and internal changes (Hitt et al., 1998). The reason not to focus on the strategic flexibility is that it does not solve the fundamental problem of whether to be internal or external oriented. The strategic flexibility merely changes the time
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scale upon which the strategic decision is being made. But in the end even a firm with strategic flexibility has to deal with the issue of whether it should look at the external or internal environment in order to be profitable.
Finally, the connection between the external and the internal environment makes one question whether it really matters if you are focusing on one or the other? As Henderson and Mitchell (1997, p.9) state:
"...firms undertake strategic actions in response to their (external, red.) environments and, as a result of those actions, develop particular capabilities. In turn, though, the capabilities that the firms develop also shape competition".
The conclusion of this discussion is that there is no logical answer to the question of being external or internal environment oriented. There is no "right" or "wrong" in strategy. Therefore, it is interesting to see how the software companies are dealing with the paradox in practice. However, it can be assumed that the main determinants of software industry can give us opportunities of understand the which determiners are important.
3.4.3. Strategic determinants
From the descriptions of different theories, it can be said that both external and internal environment's factors influence firms' strategic choice. However, the factors
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researchers do not indicate the same determents. In the external environment Porter's industry analysis (five factors), PIMS, PEST, and market segmentations are the main sources of determinants. More specifically it can be summarized that political situation, economic stability, social cultural setting, overall technology development, customer, markets, rivalry, substitutes products, suppliers, buyers, and new entrants are the main strategic determinants, which belong to the external environments. On the other hand, core capabilities, core products, finished products, financial resources, internal technical resources, and physical resources (e.g. machine) are the main internal environmental determinants. However, these determinants can be found in a graphical presentation (3.6). The strategic determinants, which belong to the internal environment are showing in the inner circle and the strategic determinants which are belongs to the external environment are showing in the outer circle of the picture.
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3.6 Main strategic determinants Political situation New entrants Economic stability
Customer Market Core products Core competences
Finished products Suppliers Company (internal environment) Financial resources Human resources Technology Technical resources Buyers
Rivalry
Social-cultural setting
Substitutes products (external environment)
Source: Own, main strategic determinants
However, it can be assumed that every strategist has their own view and these determinates can be identified/ analyzed in their own way. The presented determinates are only based on 'theories' without considering any specific industry. The main strategic determinists in the software industry can be found in the analysis chapter.
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4.
Empirical data
This chapter contains the empirical findings gathered through six interviews with firm in the software industry. To avoid confusion among the statements the interviews will be presented separately. The presentation starts with the interviews at the three big companies and ends with the three small companies. Due to the fact that the respondents are representing their company the information will be presented as if it was the company itself.
4.1. Big companies
4.1.1. Company B1 B1's view on the software industry According to B1, the growth of the software industry is experiencing a break at the moment:
"The "big boom" in the software industry that has been going on for quite some time ended more or less with the millennium shift."
B1 explains that there are a lot of companies who are going out of business because the economy is slowing down. The key is to take market shares at the moment. It is about staying competitive by keeping up the product - but with the given resources. Today you cannot launch a big investment package on the stock market and
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thereby get a lot of money to reshape your business. The cause of that is:
"Everybody is looking for where the 'bucks' (money, red.) are going".
B1 continues by describing the software industry as a place where it is becoming hard to justify the "best of breed" solutions:
"In the software industry there is a tendency from 'best of breed' to the big players".
B1 presents two perspectives that explain this. Firstly, the big players are catching up. Secondly, the "best of breed" solution must be very much more efficient than a solution that belongs to normal software package because integration is very expensive.
To stay competitive in the software industry one has to make the right decisions and the right moves all the time. Making one fundamental wrong move and one might be out of the business. Firms like SSA prove this. From being market leaders in the business application field fifteen years ago, they are almost gone from the market today.
B1's strategic focus
"The market is of course something that you most regard when you form a strategy. And what we have had are putting into perspective where we can 'beat' the competition the easiest way or where we are strong ".
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Company B1 positions itself by looking at its current product portfolio, then at the current market and where it has a strong position. Finally B1 examines whether it can sell more in that area. Because of limited resources the firm would not focus on things where it does not have a market position anyway.
There are several aspects that B1 takes into account before positioning itself. The first thing is to look at the core product that B1 is selling and find out whether it supports the processes required by the particular market segment. The following quota explains the underlying reason for this:
"Basically, it is all one core product, it is the same product, but you set it up differently. Niche it to the market".
The respondent explains the underlying historical development as follows:
"In the beginning you sold independent systems, like financial systems, customerorder system, pay role system. After that the new things was to integrate everything into one package. With this package you could go to the market and say that you have one package from one supplier. That meant that the customer did not have to build bridges between their systems. Such a package could sell to all companies because they came from a very disaggregated world. What followed was that the software companies had to be more specific, the general package was not good enough".
Therefore, B1 started to develop industry specific applications, which is a two-way strategy. Firstly, you streamline the sales organization to talk market specific terminology and to learn about the requirements
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and the regulations and the processes in the chosen industry. Secondly, the software product has to support the processes.
To find the requirements for a software application and to keep the application up to date B1 analyses competitors and customers. According to B1 you have to look at competitors, what are the competitors doing, where are they anywhere from hurting us. However, this is mainly done by asking new customers or former customers why the changed system. B1 is building relationships to customers to learn from their needs.
"Building customer relationships is therefore important, but not at any price".
B1 argue that one has to be very specific when choosing companies to do partnerships with. It has to be a company that is leading in its industry or a company that is on the leading edge of what is possible in technology. If it is a company that just follows the crowd then they will adopt the technology once it has passed its peak. B1 works only with companies that want to change their business and take advantage of new technology and solutions rather than just follow the other ones. There is usually a sort of partnership involved. The partnership includes that both companies would like to coexist.
B1 is a global player and therefore has to consider the geographical aspect as well. The different laws and regulations might affect the strategic decision. A part from the geographical aspect there is the technical aspect. B1 argues that even if one has a working application
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it is crucial to keep up with technical development on which the application is executed.
"We have been in the business for close to 20 years and of course the hardware development underneath the implementation has changed dramatically".
According to B1, even the best software application will be a failure if it is not complying technical standards.
B1's competitive advantage
"In the niche markets we have functionality that is better than others. In that area it is the product, in other it is the service".
Furthermore, B1 is a 'one stop shop', meaning that they do software, but they also have and implementation organization. They do not implement their software through third parties. This makes the implementation specialists, consultants, in the B1 network much closer to the core company, and that result in higher quality in the installation.
4.1.2. Company B2 B2's view on the software industry During the economy of the late 1990's B2 had a growth strategy. It was easy to get money from the financial people in order to grow. The financial support was based on a belief in later earnings. This has changed now. The software companies, including B2, are more
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interested to make profit right now. Everyone is focusing very much on that. B2 is looking at where the company has possibility to make money.
"I think, we are somewhere in the middle of nowhere, nothing dramatic is happening on the market or in the technology".
B2 believes that after the change to year 2000 nothing dramatic has happened in the technological aspect of the software industry.
"People are more important now then the couple of years ago."
According to B2 it is a more stable situation then it was a couple of years ago. However, there is always a fight on the market, but the fight is not so much about who has the best software package. It is very much about the consulting organization, the people implementing the systems. That is how you get new business on the market.
B2's strategic focus
"If you look on the market everyone is probably searching some special niche where they can be stronger than the other one".
B2 are looking at what market should penetrate and where it might have a strong position with its product. At present B2 is planning to focus on seven different segments and skip all the other ones. The seven segments were chosen according to the amount of experience in those segments and because B2 believes that those kinds of segments will invest in software.
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A couple of years ago B2 took a decision to have more directly selling from existing customers. B2 mentions two reasons for that decision. Firstly, to understand what the customer really wants in order to develop the software even more, and secondly, the people inside B2 should learn more about the customers business so they can identify new business opportunities.
The macro environment is taken into account when deciding where to grow. Especially when deciding which country to focus on. Examination of BMP and economic growth is important issues.
In the Swedish part of B2 they forecast 12 month in advanced. For the company growth and where they are looking 2-3 years a head.
B2's competitive advantage B2 believes that component based software is the reason for their fast growing. The component based software product makes it easy for B2 to add new components to the existing product (software). Furthermore, B2 is able to set up small independent groups to try out new business opportunities.
"Try in the small group and then, like rings in the water, spread their experience throughout the company".
It is a basic idea of B2 organization to have small independent groups that can go in different directions.
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4.1.3. Company B3 B3's view on the software industry
"I have been in the software industry for 15 years. It is always a not developed market. It is not like selling cars. That is a developed market. You can look into the future and have a fairly good idea what will happen. Software industry is not like that. It is still a very complex business - you don't really now what is happening".
According to B3 the software industry is changing all the time. It is changing faster than the market can adapt to the changes. The respondent is explaining that during the past fifteen years people have always said: "in five years from now the industry will be none complex and more static", but that has never happened. B3 does not think that the market will become a static solution.
In B3's arena of the industry there is a large amount of competition. And there has always been. However, B3 is focusing on large accounts with large data volumes. There are fewer competitors dealing with large accounts and large data volumes. But the competitors are only big software companies. B3 explains it as follows:
"The big companies in Sweden only want to do business with big software companies".
The other big companies (customers) do not want to buy from a small software company because they do not know whether the little software company will be on the market next year.
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B3's strategic focus
"A key thing is that we tried to divide the market into different segments. When we do that we always look for our decision. We are trying to make sure that it is not overcrowded with competitors. See that we have unique selling points within that arena. And then go for that area and not try to run after deals in all the other areas".
B3 points out that it is important to focus on specific segments because their software can be applied for many segments. When B3 has made a strategic decision about working in specific areas they focus on these only. That is very important, because otherwise B3 would spread their resources around on many areas.
B3 product development is purely customer driven. B3 customers can send in requests about changes in the software. B3 will then consider the requests for a new release of their product. If B3 goes into new areas it is always customer driven. Some customers tell them to enter a new area and maybe B3 will do something jointly together with them. If several customers come up with the same idea B3 might do a product out of it.
B3 is heavily involved in cooperation with other firms. This is mainly due to the fact that B3 has a very small consulting department. B3 is trying to make the software together with large consulting companies. B3 has partner relations with all the big consulting firms. B3 spends quite a lot of time on their partner relations.
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The macro environment is not influencing B3 business. Furthermore, B3 find it to be an excuse for not succeeding. B3 is looking more on the micro level, meaning the specific businesses.
B3's competitive advantage B3 competitive advantage lies in having unique products and unique market position backed up by good competence. The respondent points out that the strong market position is very nice in these rough times. The advantage of market position in the software business is in being attractive for the large Swedish organizations. One has to have a fairly good market position to be attractive. According to B3 it is expensive to go with a vendor the first time. Therefore, they will staywith their vendors or choose a vendor that has a good market position.
4.2. Small companies
4.2.1. Company S1 S1's view on the software industry
"Earlier you made a program you compiled it and it could work for 10 years! The environment did not change. Today the environment is changing all the time".
According to S1 the technology is changing very fast. The pressure on programmers is increasing. They have to know much more today they have to know the whole environment and the environment is changing all the time. A software company has to follow the
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technological development all the time. A company like S1 looks at how new technology fits to its solutions. In case of a match they will adopt it. Otherwise, the company would sit back with old software.
With today's object-oriented components in the software industry it has become relatively cheap and fast to build software. It was not like that before. That is because a company can reuse the software components. Today's programmers are not developing software they are building software. It is like the toy LEGO; the programmer just has to put the pieces together. S1 is developing complete software and solving relatively complex solutions with only two programmers. To do what they are doing today you needed 20 employees before. Today the companies have to focus on understanding the business and understanding the problem, as the respondent expresses it:
"Software in itself is nothing. It is the service and the knowledge of customers that makes it important".
It is not only the technology that is changing. S1 think that the customers have changed too. The customers know what they can expect from a software package. The customers are not very surprised that your software package can write, print, format etc.
"It feels like we have come to a situation where the software industry has become like electricity or something. Everyone takes it for granted. If you sell an ERP package you don't have to describe the components inside the system. Everyone knows what you can expect from that kind of software. Go back 10 years, there you had to describe what the software was doing".
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The danger of dealing with experienced customers is that the often have an opinion about a certain product. According to S1 the customers do not act neutral. In this case S1 believes that selling a software product it is more about emotions than it is about having the best product. Because people are having an opinion on software it is much more religious or political today.
S1's strategic focus S1 strategic focus is always based on what the core of the product looks like. When S1 has a core solution, in this case software and the knowledge about the software, they look for a market that fits the core solution. In other words, they are not finding the market and then fitting the product to the market. S1 explains this procedure as follows:
"If you go for lucrative markets it would be an extremely surprise if there was not someone there already. Secondly, you might go into the trap of never ending development. It is so easy to find a market where there is big money and you develop and you develop. But you can't do that today because it is too expensive and too risky".
However, with this S1 does not mean that the company is not flexible. It is flexible but within the limits of the architecture of their solutions. According to B3 a company needs to have a good architecture that is flexible from the beginning. According to company S1 there are two ways of developing the basic components. The first one is to work closely with universities:
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"You work with guys who are the top guys there (university, red.). They know everything about the trends the latest developments, the most interesting ideas. Based on that you can say there most be a need. So you make your solution. Then you have made your first component and then you go out and look for a market that fits. It is science driven. If you have the luxury of having those kind of contacts".
Another way is to start from a need. The company has to discover a very specific need. As a company you go for that need make a solution and then look if anybody else has made it.
S1's competitive advantage B3 state that their competitive advantage lies in the fact that they pick their market, which means that they also pick competitors.
4.2.2. Company S2 S2's view on the software industry From a technology point of view the software industry is changing/evolving all the time. This evolution forces the actors of the software industry to change. S2 also thinks that it is changing from a customer's point of view. The customers are more and more aware of the opportunities in software.
"The bubble effect has cost a lot of money. It is becoming more and more like a traditional industry it is the delivery that counts".
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S2 have to deliver something and prove that it is working. Building a software system has become more like building a house. However, the difference between building a house and building a software system is that you can reuse the previous buildings for new buildings. Therefore the systems S2 are building are quite rapidly built.
S2's strategic focus S2 has done two different strategic approaches. In the beginning S2 anticipated a market need for a certain technology. The technology would enable S2 to gain relative advantage over competitors. Therefore S2 introduced a strategy based on the anticipated market need of the technology. This strategy was fulfilled in 1999 where S2 launched the first software product for developing the technology. The problem was that the market did not respond:
"There was a lot of interest. A lot of hits on our website and a lot of attention - but not too much money".
Now S2 has turned its strategy toward its customers. S2 saw that it had 90% of its income from strategically not focused customers. S2 realized that they possessed something that is of valuable to their customers. S2 therefore decided to dig into the company and look at what it was capable of doing. The outcome was a new product family, which was oriented towards this market.
When developing the new product family S2 decided to speak and listen to the customers.
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During this listening S2 had their competence, experience in mind. They did this to avoid developing a strategy, which they could not fulfill.
S2 know that their product can be applied to other markets. The problem is that it takes long time to know a new market.
"Since we are few employees. Learning a new branch takes long time. It takes a lot of time".
According to S2 partners might them out of that problem. S2 build relationships with customers who need S2 technology and in return S2 can learn about the customers' market.
S2's competitive advantage S2's competitive advantage is based on knowledge and technology. If other firms should try to take S2's market it would last them at least 1- 2 years to reach the level of knowledge and experience that S2 has now.
4.2.3. Company S3 S3's view on the software industry In general S3 perceives the software industry as very dynamic. A company can be 100 % certain that if someone comes up with a great solution, 100 other companies will come and try to make the same solution.
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S3's strategic focus
"When you are a small company the only way you can say that you are best in something is by doing it consistently".
S3 is very focused on one niche in the software industry. With 6 employees S3 would have difficulties convincing customers that they are the best on the market in many things. S3 believes that focusing is the only way to be competitive and being a head of all the others.
"We are on track, we don't go around doing lots of other stuff".
In other words, positioning on the market is a very important strategy for S3.
In the beginning S3 was looking at what the players on the market was doing. After an analysis of the competitors products S3 knew the strength and weaknesses of the competitor's products. Upon the analysis S3 started to develop a product that contained the positive things found in the analysis and improved the negative things found in the analysis. This strategy was very dependent on the abilities and resources of S3 and what S3 could produce. The focus was on what S3 can do and how can they could do it better. This it is very important because it enables one to produce something and come on the market. However, at the same time one has to be aware of the market needs.
Now that S3 is on the open market they still look at what the competition is doing but are also listening to the customers. The customers know a lot and use the system every day. It is from the
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customers that S3 gets its inspiration for new releases. Furthermore, it keeps clients happy and attracts new clients. However, one should look at what how important the customer is and whether S3 is able to fulfill the wishes of the customer. S3 ground role is to stick with its business area and to the business plan. S3 believes that if one follows the customers too much, then there is a risk that one starts spreading. A small company like S3 cannot afford that.
S3's competitive advantage
"We are very good at listening to our clients. We are a small company and very flexible, which means that we can develop something very fast".
S3's clients see that S3 listened to them from one version to the next version. Further S3 state that their program allows the user to do more than the competitors, they have more functions, it is cheaper, they give you the best support, and it is very flexible. S3 can much easier update and create new functions. S3 listens more to the customer. Many large competitors do not really care because they are big. For S3 even small customers are very important. Therefore, S3 believes to have a better customer care.
At the same time S3 educates their employees by letting them attain courses. S3 think that it is important to have the skilled resources in the company in order to be prepared for customer demands.
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5.
Analysis
This chapter will have a closer look to the strategic determinants in the software industry. In the first part of this chapter the strategic determinants of big and small companies will be analyzed separately considering the internal and external environment, followed by a short discussion which presents on an overview of the main strategic determinists of software industry with compression between big and small companies. The next section will have an attempt to find out the reason behind the existence of these factors in software industry. The last part presents firms' strategic focus considering the treatment of the main strategic determinants to be competitive in software industry. Furthermore, all discussion in this chapter is based on the conducted empirical material with the help of theories (which can be found in the previous chapters)
What are the main strategic external and internal determinants in the software industry?
5.1. The strategic determinants regarding external environment
The conducted interviews with the six personals from six different software companies indicate that there are some fundamental strategic determinants, which belongs to the external environment. Because of the differences of resources of big and small companies, the
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discussion is going to present the strategic determinates of external environments separately.
Big companies Many researchers (e.g. Johnson and Scholes, 1999) found that the external environment has a big influence on firms. Furthermore, they argued that firms should consider the external forces and adapt the changing situations (more information can be found in the frame of reference). On the other hand, Hill and Jones (1989) put emphasis on macro environment especially political, economic, social and technology (PEST). However, this empirical findings shows that effects of macro environment in big software companies are existed and complex too, especially the effects of economy is a considering factors. The economic slowdown (macro environment) makes the situation more complicated finding new business opportunities.
However, One interviewee (B3) claims that there is no influences of macro environment on their firm but in some point of view the result shows that this firms (B3) also consider the external environment. However, two other interviewees (B1 & B2) think that there are some clear influences of the external environment on their firms, which are necessary to consider in the strategic point of view. However all the interviews (B1, B2& B3) clams that they are more focusing on present businesses. They also state that they give more concentration to the existing customers, markets as well as the present business than potentials segments. They (B1, B2 & B3) often use consulting firms to find out the potential markets and gather information regarding
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existing markets. That means that they are highly market oriented and focusing on changing external environment. One interviewee (B3) argues that they always keep a chain of relation with their customers. Moreover that interviewee (B3) claims that they are not selling products, they are providing the service incessantly to the customers. That means the existing market is a vital factor for such companies and they are highly customers oriented.
On the other hand the big software companies think that the technology is also changing rapidly but changing of core techniques is much more stable than before (90s). However, developments of hardware, especially storage capacity and the speed have a conclusive connection with the firms' innovation and development of software. That means that software industry is very much technology oriented and the big companies are forced to use the most available technology. The changing time and customer's preferences also drive the strategic choices. That means that research and development activities play the key role in software industry.
Moreover, those interviewees claim that the exchange of idea and knowledge with existing customers is vital for big software companies and that also helps them improving products. The big software companies believe that customers are now more trained than ever as well as they have good knowledge of their products. Moreover these interviewees (B1, B2 & B3) believe that it should get a priority to consider specific needs. Furthermore they think that 'customer orientation' helps them to find new business opportunities. That
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means that these companies are considering the overall changing of external environment intimately as well as their market/customers.
Grant (1998), Porter (1985), Porter (1984) emphasize the need to find the profitability from the market segments. Those strategists also claimed that effective strategy is often market oriented and segmentation is the vital component why to concentrate on specific market(s). The present study found that these big companies (B1, B2 & B3) are involved in more than one type of business and they are using the market segmentation. Furthermore, all included big software firms (B1, B2 & B3) are operating internationally and each subsidiary gives their concentration to the local market. Furthermore they are more interested to stay competitive in existing markets by keeping up the present products/business. However all finished products are derived form core products(s). They also claim that the social system is an important factor for selling software. There are some software products that can be used in different markets even in different geographical markets. But that does not mean that there are any alternatives not to be specific in market concentration.
On the other hand, Porter (1985) emphasized industry analysis and claimed that there are five factors existent in all types of industry, some of the factors are very important in some specific industry (more details can be found in the part of theoretical framework). Present study found that rivalry in software industry is very high. Rivals are always keen developing to their products and they always look to the competitions-what are the others doing? In most cases rivalry belongs to technology development. That means that all the software
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companies are developing their products in a very competitive environment. Moreover, the study found that big players have little completion with the small firms; the rivals of a big company are other big companies. However the big companies are bewaring to keep the relation with the other big players in different industries. One interviewee (B3) claims that the Swedish big companies are more interested to do business with other big software companies; the main reason is that there have no guarantee of existence of the a small farm in future years. That means that the reliability/goodwill of a company plays a key roll in software business. Furthermore, long-term partnership between big companies in different companies/industries is often found, that also secures the firm's markets stability, technology advantages moreover competitive advantages.
Small companies There are thee small companies that are included in this study. However, the small companies likely concentrate in only one business (market) and rare more than two.
Many strategists like Hill and Jones (1989) emphasized that the effects of macro environment are very important for all types of business. This study also shows the importance of macro environment considering small software companies. They all (S1, S2 & S3) agree that the environment of software industry is changing rapidly and they are giving their concentration on specific business. That means that each of these businesses has its own characteristics and there is no alternative way to adopt rapid changing external factors (e.g.
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technology, economy, market, customer etc.). One of the personal argues (S1) that they have limited resources and rivals may also have the same resource, so they need to provide some additional facilities/services to attract customs. Furthermore, that interviewee (S1) also believes that now the environment is changing much faster than in the past. So they (S1) should concentrate on specific markets and find more improved and problem solving products. That means that small companies in software industries have limited resources and they need to develop their products for rapid changing target markets.
However, the small companies think that the concentration on customer's need is vital. According to that interviewee (S1), the idea about future product/improvement often comes from existing customers and facilities (idea) can be added to next versions of the products. So, the product development activities are maintaining endlessly. Moreover, all the development procedures are technology driven as well as target market oriented. Another personal (S2) thinks that customers are now well informed about the opportunities of specific software, they (customers) know what they are buying. That means that the small companies are highly customer oriented and they are beware to fulfill of customers' needs.
Moreover, the small firms think that customers are free to choose products from different software firms. That means that the rivalry in software industry is very high considering small companies. Porters (1985) five factors and industry analysis is applicable in software industry. One interviewee (S1) claimed that if one rival introduces one additional facility in a specific type of products than that
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facility/component becomes an ultimate part for similar kinds of products.
5.2. The determinants regarding internal environment
However the study found that there are some strategic determinants, which belong to the internal environment. The discussion of strategic determinants regarding the internal environment will be conducted separately for big and small companies.
Big companies Many modern time writers (e.g. Grant, 1998, Parhalad and Hamel, 1990) have argued that internal resource building is the key matter for competitiveness. Moreover this thought sets value on building core competences/capabilities as well as giving concentration on core products. This study found that big companies are involved in different software businesses but all finished products derive from the core product(s). Furthermore, development of those finished product(s) are highly dependent on the development of 'core products'. They (B1, B2, B3) think that if they rely on core product development that will also show the subsequently products. One of the interviewee (B1) asserts that they are successful because they have unique products as well as an unique market and more important internal resources. That means that internal resources,
competence/capabilities are the major factors for choosing any business.
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Many strategists like Grant (1998) attached importance to resource building as a prerequisite for firms' competitiveness. Present study found that the resource-based theory in business strategy is also very important for software industry. However, the skilled human resource is an advantage for software companies especially for big players. The development of software is very much technology driven and market oriented. However only an expert can realize the needs of the market/customers and is able to provide/develop products and/or technology to fulfill specific market demands over the changing time.
An interviewee (B1) argues that they are competitive because of quality products, however others are acting on the market by providing additional services to the customers. That means that company (B1) has realized that they do not need to provide additional service to the customers as a market leader. Moreover, this company (B1) provides some other types of facilities like "the one stop shop" to the customers. To serve the customers' demand is not only necessary to provide better products but also better customers support.
Stalk et al (1992) have argued that five principals (Speed, Consistency, Acuity, Agility and Innovation) are vital for competitive advantage. This study found that speed and consistency are the most important variables for software industry. The component-based software is very helpful for software companies because that also allows them to develop specific parts separately. That also allows them to keep developing activities endlessly and they also can provide a latest version of finished product within 'a very short time'.
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Integration of software in single packages is complex but the component-based software helps to remove such obstacles. Moreover, the study found that they are using the most developed technology to attend the demand of different customers' needs. That means that development of technology can drive further products.
Small companies However, present study found that introduction of new products is also an essential part for small companies. Stalk et al (1992) states that there is no alternative beside innovation. The small companies (S1) think that today's programmers are not developing software, but they are actually building software. That means that research and development is also an important matter for small software companies and that they are highly dependent to building the core competence. That means that customers' specific needs are the main factor for these companies. The study also shows that the development of core product(s) is very important for all these small companies as well. They claim (S1) that if they develop the core products that also ensures them to offer more 'facilities' to the customers. That means that these companies give more concentration on development of core product(s).
Furthermore, they (S1) claim that they cannot only rely on the market but also have to regard the internal resources. There are some big earning businesses but that means that they will need to invest more and take more risk, and they might not be able to enter in such business because of limited resources. Another personal (S2) claims
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that building software is like building a house but software can be reused and develop. That means that building skills and knowledge are vital in software industry and that can be achieved in a long run. Building core competences/capabilities is very important for all companies. (Hamel and Prahalad, 1994). These companies (S2) are more interested to develop the core product because they think that also helps them to build a 'new product family'. On the other hand, another personal (S1) claims that there are no alternatives of flexibility for small software companies. That also reminds us that the market does not only drive small companies but it is also very important to consider the opportunities and abilities (resources). According to that interviewee (S1) no company ignores the importance of markets. That means that finding a connection between these two aspects (i.d. specific market and available resources) is necessary for small firms.
However, Slater and Naver (1999) claimed that the market orientation does not only focus on the market, but also means to understand all circumstances. One interviewee (S1) claims that on the one hand the product can serve an existing market demand, and on the other hand provide new innovations that are not explicitly demanded but very helpful. That means that the internal resource is vital matter for gaining the ability to create and/or provide such demand. Another interviewee (S3) claims that they are flexible and they have the skill to provide better and fast service and their product are designed to fulfill the specific market demand. That means that they have strength of core product (s) and capabilities. Furthermore, they (S3) emphasized the necessity of skilled human resources.
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5.3. Comparison strategic determinants according small and big companies
Evaluating strategic determinants in software industry this study has not show any significant differences between big and small firms. However, the big companies are more focusing on external environment then the small companies and the small companies are focusing on resources. The small firms have limited resources and they are involved in particular (one or two) business and they are focusing more on resource-based strategy. However, the big firms are mainly involved in different businesses but all the segments are supported by the core product(s). Those big firms have well-heeled resources and they have the ability to find new business opportunities any time. Both small and big companies are highly customer/market oriented as well as technology driven and the rivalry is very high. Moreover, all types of business (or business segmentation) have their own rivals and customers/market and all business are highly depended on technological development. The change in external environment especially the regression of economy has a negative influence in software industry.
On the other hand, the study also found that both big and small firms are highly relying on their resources. All of the researched companies are emphasizing the development of core competences and core product(s). The big players gain advantage through resources (e.g. human, technology) that also help them to keep market position in the existing business but they are very careful about new businesses. However, each business has its own unique characteristics and each
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company has chosen target market (s) considering its capabilities. Both small and big firms are always considering the market opportunities but they are more interested to give concentration on existent businesses. Moreover there are direct relation with core and finish products.
5.1 Main Strategic determinants
Market/Customer
Economy
Core products
Core competences
Company
(internal environment)
Human resources
Technical resources
Rivalry
(external environment)
Technology
Source: Own, main strategic determinants in software industry
In the literature, writers like Grant (1998) considered both the internal and external environment for the development of firms. This study found that all the researched companies are very much influenced by both external and internal forces (main strategic determinates are shown in figure 5.1). Barney (1991) argues that a firm that is able to understand the strength and weakness by internal analysis and the
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opportunities and threats can be found by external analysis of the environment (more information can be fond in the theoretical framework). However all big and small companies are highly market driven and dependent on technology development as well as on human resources. There is a direct relation between core products and finished products. All types of business segments have their own rivals as well as characteristics but all development process is based on core product(s).
Why are they the main strategic external and internal determinants and how they are related?
5.4. The Relation between different internal and external environmental factors
The study also found that there is a direct connection between different identified strategic determinants. However, these factors could be presented individually but they are adjoined closely with each other regardless firms' focus on external or internal environment.
The technology is the key factors for software industry; technology can be developed inside the firm or can be added from outside (e.g. partners). All the researched companies are focusing on target markets. That also means that they are concentrating on specific customers and are aware to fulfill the customers' needs. That means that customers and market are not separate issues in the 'firms' focus' point of view. However firms' resources are the key factor to provide better products as well as services to the customers to enhance the
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target market; these can help to provide the product which can create/fulfill specific demand of the customer. The finished products are developed for specific market(s), however all development activities are focusing on core products. For developing the core product, resource buildings (capabilities) as well as partnership building with other companies/industry are key issues. The ultimate outcome is the competitive advantage of the firm. In the fast changing external environment firms need to allow feedback from the customers and give their concentration on innovation and
development. That also helps to get advantages over rivals. The innovation of a firm can contribute to the overall technology development (function of main strategic determinates are shown in figure 5.2.).
5.2 Interlinks between different strategic determents
Technology Development
Customers orientation and core market analysis Developing activities Product for specific market demand Customers' feedback Services
Information sharing/partnership building
Competitive advantage
Source: Own, function of main strategic determinants 88
Strategic Determinants in the Software Industry
However, all the activities are causally determined by each other and the combination of all activities is a prerequisite for competitive advantage of a firm, all activities are active simultaneously.
What should firms focus on to handle the main strategic determinants to be competitive in software industry?
5.5. Firm's focus in order to handle the main strategic determinants in the software industry
The findings show that the main strategic determinants in the software industry are closely interrelated. This is an approach to present some key activities, which are essential to handle the main strategic determinants.
Product innovation/development The finished products can be marketed in different labels and each label should have the ability to solve particular problems. However, the core product(s) should be out of one particular category that focuses on the company's core capabilities. Therefore a high level of integration of different technological developments is necessary and the product should be able to fulfill the specific customers/market demand. Those for software companies invent or develop new kinds of products. Furthermore, the product should have following attributes-
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Strategic Determinants in the Software Industry
The software should be user-friendly The software should ensure more advanced facilities Software should be able to contain more data Attract more users
Relation building with customers Providing necessary support to the existing customers is vital for Software companies. However, the customers require a consistent, high value stream of advisory, audit, & strategic services to ensure customers' satisfaction. Software companies can provide some exceptional services to the customers through 'commitment to customer satisfaction' that also can create the specific software's demand in a new market.
Resource development (technology) The resource of software companies can be used in different ways and they can share the development of technology with each other. That can also create a demand for new types of product. Technological development can be deployed in different types of businesses and software firm can go close to customers by using more developed technology.
Resource development (human) Although software industry is very much technology oriented, human resource skills can make the difference within two firms, which have the same technology. A software firms should remain developing activities on human resources. Furthermore work with university,
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partner firms, and internal education can be a central issue to be competitive in software industry.
5.3 Firms focus on to handle the main strategic determinants
Development/Innovation
Relation building
Resource development (technology)
Competitive advantage (Company)
Resource development (human)
Partnership building
Capabilities building
Source: Own, firms' focus
Capabilities/ competences building Software industry is very competitive and firms need to develop their capabilities as well as tangible-intangible resources. Furthermore, they need to understand their overall position and to analyze their financial, human and physical resources for subsequently development.
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Establishment of partnerships with related parties Working with partner companies is also essential for all technologyoriented companies especially in the 'technology transfer' point of view. Technology development can be achieved within or outside the firm; building partnerships with other companies/industries could be a optimum approach for acquiring the most developed technology. Moreover, technological development in one industry/company can be used in another industry/company. That also helps to create/increase demand as well as to cut the costs. Therefore, the cross industry technological development can be a crucial issue to be competitive in software industry.
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6.
Conclusion
This chapter will present a summary of this thesis. Besides, this presentation considers the problem statements of "the strategic determent in the software industry" as well.
The term of software industry is gigantic and complex. There are numbers of businesses and different determinants, which are important in each of the business. When we look on the theories, there are several strategic determinants that can be identified in general. The external or internal environment has some influences firms' strategic choice. The main theme of these two dimensions is that a firm can adapt the external environment to act in conformity within the whole environment. Secondly a firm can focus on the internal environment (e.g. resource, capabilities) to be competitive. These two concepts are known as 'inside out' 'outside in' approaches in the firms focus point of view.
However, the study found that there are no significant differences between big and small software companies on the firms' focus point of view. Big and small companies are involved in different businesses. One of the most important finding that the main strategic determinants are belong so both external and internal environment that also shows that the researched companies are considering both the 'inside-out' and 'outside-in' approach.
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6.1. Strategic determinants in the software industry
This study has fund a number of strategic determinants, which are active in software industry including external and internal environment. These are:
External determinates
•Market/customer •Technology •Economy •Rivalry
Internal determinates
•Core competences •Core products •Technical resources •Human resources
6.2. The relation between external and internal environment factors
The present study shows that the main identified strategic determinants in software industry are maintaining the linkage between each other but at the same time each of these factors has to be analyzed separately. Innovation/development is very important in software industry. Technology plays the key factor to serve the market demand. Companies need to develop core capabilities to be more
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efficient. On the other hand, human resources are very important for the integration of technology, and tangible and intangible resources. Moreover, all the functions of a firm should be centered on target market(s) as well as specific customers. Therefore, product development means developing the core products considering feedback from customers. That's why all of the researched companies are focusing on present market and they are more customer oriented and technology driven.
6.3. Strategic focus
However, the study found that building capabilities/competence of a company is more important than considering the future opportunities and/or changing external environment. All of the researched companies focused on specific markets/customers. The specific customer's need is very essential for software industry. The human resource and technology development is necessary to handle the market's demand. All the development activities should focus on core products. That could be a magic combination for competitive advantage in software industry. Moreover, a software company is highly dependent on technology development; the technology can be achieved by own innovation or acquired from outside sources. Therefore, building partnership with different industry/companies in increasingly is very necessary. However, each company should develop the strategy considering their own capabilities.
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6.4. Personal reflection on writing thesis paper
Working with a master thesis project and taking an academic course is not the same thing. A master thesis project helps the student to develop and to follow his/her own individual ideas and thoughts under superior guidance. Besides the well-established research theories and practical data, personal reflection leads to an ultimate result. However, writing a master thesis is more a learning process than taking any course-based study. It also gives students an opportunity to work in a deeper field of study in their interesting field.
"The strategic determinants in the software industry" as research topic was chosen, but when conducting the study it has to be considered that software industry is very big and complex. The included software firms are involved in several types of software businesses. Each type of business has its own unique characteristics and the market is also different. However more or less all type of software business is closely related and the development of technology can affect all type of business as well. This diversification of business might make thiswork more difficult.
In a final word it can be said that software industry has a good prospect in the near future and the industry is still growing rapidly even in a situation when the global economy is slowing down. The uninterrupted development of Internet technology and memory storage capacity can facilitate the future prospect for software industry.
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7.
References
Thesis writing
This thesis project has been started in the middle of Oct 2002 as a group work of two international master students (Bjørn-Henrik Zink & Sadat-ur Rahman). After working more than eight weeks we made the decision to complete the thesis paper separately. That means that each student has it's individual version of thesis paper. However, the Introduction, Methodology, Frame of reference and the Empirical data are containing more or less same data/text (except some little changes). Last sections in this thesis (analysis and conclusion) have been written completely independent.
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Interview Guide
Company Information:
Appendix A
• •
Firm size o Employees o Turn Over Firm position o What are you producing? o Who are your main customers? o Who are your main competitors? o What is your relative position?
Industry/Market Information:
• • •
Describe how you perceive the software industry? Describe how you perceive competition in the software industry?
Orientation: What determines your strategy? o Resources? o Capabilities/Competences o Customer? o Competitors? o Industry? o Macro Environment?
•
Why are you (not) focusing on: o Resources? o Capabilities/Competences? o Customer? o Competitors? o Industry? o Macro Environment?
What do you consider being the most important factor(s) for success in the software industry? 104
doc_544673884.docx
In linear algebra, the determinant is a value associated with a square matrix. It can be computed from the entries of the matrix by a specific arithmetic expression, while other ways to determine its value exist as well. The determinant provides important information when the matrix is that of the coefficients of a system of linear equations
STUDY REPORTS ON STRATEGIC DETERMINANTS IN THE SOFTWARE INDUSTRY
Abstract It is generally recognized that firms face both internal and external environmental forces. However, few studies have attempted to describe the importance of various strategic factors and the relation between them. This study has been conducted to identify the main strategic determinant in the software industry and the reason behind the existence of these determinants. The study is based on a qualitative study. The empirical data have been collected from interviews. However, the frame of reference is based on well- established theories within the field of business strategy. The research identified certain strategic determinants in software industry. These are Market/Customer, Technology, Economy, Rivalry, Core Competences, Core Products, Technical and Human Resources. These factors have an impact on researched firms separately and jointly as well. However, competitive advantage can be achieved by focusing on product innovation and development, relation building with customers, technology and human resource management, capabilities/competences building and alliances with other companies and industries.
Nyckelord Keyword Software industry, strategic determinates, internal environment, external environment
Table of Content 1. INTRODUCTION????????????????.1
1.1. BACKGROUND..........................................................................................1 1.2. PROBLEM STATEMENT.....................................................................3 1.3. PURPOSE.......................................................................................................4 1.4. DELIMITATIONS .......................................................................................4 1.5. TARGET GROUP......................................................................................5 1.6. READERS GUIDE ....................................................................................6
2. THEORY
OF
SCIENCE
AND METHODOLOGY??.....???????????7
2.1. RESEARCH POSITION........................................................................7 2.2. RESEARCH APPROACH ...................................................................9
2.2.1. Deduction vs. Induction??????..?.???????????????????..10 2.2.2. Qualitative vs. Quantitative??????..???????????????????.11
2.3. RESEARCH METHOD.??????????..?11
2.3.1. Primary data???????????..?...??????????????????..12 2.3.2. Secondary data?????????.?.?...??????????????????.19 2.3.3. Reliability and Validity???????.????????????????????..19
3. FRAME OF REFERENCE????.???...23
3.1. THE EXTERNAL ENVIRONMENT????.???23
3.1.1. Macro environment????????????????????????????..24 3.1.2. Industry?????????????????????????????????..25 3.1.3. Market segmentation???????????????????????????...29 3.1.4. Strategic group??????????????????????????????.30
3.2. THE INTERNAL ENVIRONMENT??????.? 31
3.2.1. Strategy - firms' purpose?????????????????????????? 33
3.2.2. Resources.................................................................................................................................... 33 3.2.3. Capabilities/competences............................................................................................................ 36
3.3. SOURCES OF SUPERIOR PERFORMANCE???..?....???... 36
3.3.1. The external environment? ........................................................................................................ 38 3.3.2. The internal environmen.............................................................................................................. 44
3.4. DISCUSSION ...??????????????????..????..??..??. 50
3.4.1. Turning the inside out .................................................................................................................. 50 3.4.2. The paradox................................................................................................................................. 51 3.4.3. Strategic determinants................................................................................................................. 53
4. EMPIRICAL DATA ............................................................. 57
4.1. BIG COMPANIES????..???????????..??????...???.? 57
4.1.1. Company B1 ................................................................................................................................ 57 4.1.2. Company B2 ................................................................................................................................ 61 4.1.3. Company B3 ................................................................................................................................ 64
4.2. SMALL COMPANIES?????????????.???????.?..??.. 66
4.2.1. Company S1 ................................................................................................................................ 66 4.2.2. Company S2 ................................................................................................................................ 69 4.2.3. Company S3 ................................................................................................................................ 71
5. ANALYSIS ...................................................................................... 75
5.1. THE STRATEGIC DETERMINANTS REGARDING
EXTERNAL ENVIRONMENT????????????.???????.??.?... 75
Big companies ...................................................................................................................................... 76 Small companies .................................................................................................................................. 79
5.2. THE DETERMINANTS REGARDING INTERNAL
ENVIRONMENT??????...??????????????????..??..??..?
Big companies????????????????.???????????????..??..?..? 81 Small companies???????????????????.???????????..????..?83 81
5.3. COMPARISON STRATEGIC DETERMINANTS ACCORDING
SMALL AND BIG COMPANIES??.???????.?????..??.?..?? 85
5.4. THE RELATION BETWEEN DIFFERENT INTERNAL AND
EXTERNAL ENVIRONMENTAL FACTOR????????.?..??..?? 87
5.5. FIRM'S FOCUS IN ORDER TO HANDLE THE MAIN
STRATEGIC DETERMINANTS IN THE SOFTWARE INDUSTRY??????????????.??.?89
6. CONCLUSION?????????????.???..? 93
6.1. STRATEGIC DETERMINANTS IN THE SOFTWARE
INDUSTRY................................................................................................................
94
6.2. THE RELATION BETWEEN EXTERNAL AND
INTERNAL ENVIRONMENT FACTORS ............................................
94
6.3. STRATEGIC FOCUS........................................................................... 95
6.4. PERSONAL REFLECTION ON WRITING THESIS PAPER
............................................................................................................................ .. 96
7. REFERENCES?????????????..??.?...97
THESIS WRITING................................................................................................97 BOOKS........................................................................................................................97 ARTICLES...............................................................................................................101
INTERVIEW GUIDE APPENDIX A ????..?????...?????. 104
List of Figures and Tables
FIGURE 2.1 - DEDUCTIVE AND INDUCTIVE APPROACH......................................... 10 FIGURE 3.1 - FIVE COMPETITIVE FORCES.......................................................... 26
FIGURE 3.2 - PIMS .................................................................................... 40 FIGURE 3.3 - THE SHARE-PROFITABILITY RELATIONSHIP...................... 43 FIGURE 3.4 - FIRM RESOURCE
AND SUSTAINED COMPETITIVE
ADVANTAGE.................................................................... 44 FIGURE 3.5 - STRENGTH, WEAKNESSES, OPPORTUNITIES, THREATS (SWOT) ... 50
FIGURE 3.6- MAIN STRATEGIC DETERMINANTS??????????.?...??. 55 FIGURE 5.1- MAIN STRATEGIC DETERMINANTS IN SOFTWARE INDUSTRY???.?. 86 FIGURE 5.2- INTERLINKS BETWEEN DIFFERENT STRATEGIC DETERMENTS?.....?? 88 FIGURE 5.3-FIRMS FOCUS ON TO HANDLE THE MAIN STRATEGIC DETERMINANTS...? 91
Strategic Determinants in the Software Industry
1.
Introduction
The aim of this chapter is to introduce the thesis to the reader. The first section will give reader a practical understanding of why the topic of this thesis is relevant and interesting. After the background section, the problem statement, purpose, delimitations, target group, reader's guide of the thesis will be discussed.
1.1. Background
Imagine that you are a strategist in a software company. The media is describing your industry as one of fierce competition and rapid technology change. Even time has been changed in your industry. The information technology is one of the most important sectors in European as well as in Swedish economy. The analyst predicts that by 2004, IT will form 6.9 percent of European economy; the growth rate is much slower than the previous decade
(http://www.vnunet.com/News/1138893). That little growth may not to be sufficient for many IT companies to survive without considering specific strategic factors. There is some more shocking news that in 2003 the industry will loose 0.3 percent IT spending (customer) in Europe's (http://www.vnunet.com/News/1138893). However, big software companies are not facing equal problems like small companies. According to that market analysis, big companies like SAP, Oracle, IBM will see growth between 5 to 10 per cent and many software and service firms will go out of business. There has been such an over-investment in software that companies will think twice going
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forward. The pain point for smaller vendors is the cost of marketing (http://www.vnunet.com/News/1138893). In other words, one could say that an information technology year is reduced to one forth of a regular year. The positions of companies are changing accordingly: 86 new companies in the top 500 in Sweden in year 2001. At the same time dozens of others are filing bankruptcy
(http://skolan.presstext.prb.se). The innovation pace is said to be so high that today's new technology might be history tomorrow. Where would you look for a lasting strategic decision? So, there is a little space to find a alternative to give full concentration on firm's strategy.
However, it is generally agreed upon that strategy is influenced by both internal and environmental factors (Hill and Jones, 1989, Byars et al. 1996, deWit and Meyer, 1998; Henderson and Mitchell, 1997; Grant, 1991, 1998; Teece et al., 1997; Spanos and Lioukas, 2001). There has been much debate in the strategy literature which factors are more important in shaping firm's strategy (Henderson and Mitchell, 1997). However, strategy can reveal itself as being determined by environmental factors or internal factors, depending on what is studied. Both perspectives have been studied intensely, and it has been empirically proven that both of them are determinants of performance.
In the literature most researchers are focused on finding the root of causality from either the internal environment or the external environment perspective (Henderson and Mitchell, 1997). Therefore, it is important to balance the argumentation for both perspectives and let the findings decide which perspective is dominating or if the answer is to make a compromise between the two. The firms should
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indemnify the main strategic determinants and should focus on the strategic determinants to be competitive in the industry, which are as Henderson and Mitchell (1997) state: There are very little work that explicitly characterizes the continual, reciprocal nature of the interaction between the environment and the firms within it.
1.2. Problem statement
A problem arises because the external and internal strategic determinants appear to be true at the same time, even though they seem contradictory or even mutually exclusive (de Wit and Meyer, 1998). This is also referred to as a paradox. "A paradox has no real solution, as there is no way to logically integrate the two opposites into an internally consistent understanding of the problem" (de Wit and Meyer, 1998: p.17). The question that remains is whether the strategist should focus either on the external determinants or the internal determinants or choose to focus on both as much as possible at the same time, which will possibly reap benefits of both. The first question is:
• What are the main strategic external and internal determinants
in the software industry?
A natural extension of this question is to ask why a company is highly influenced by strategic determinants. The second question is:
• Why are they the main strategic external and internal
determinants and how they are related?
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Finally, it is interesting to find out what firm should focus on in order to handle the strategic determinants. The third question is:
• What should firms focus on to handle the main strategic
determinants to be competitive in software industry?
With these three questions, the research aims to clarify what drives the strategic choices of organizations in the software industry.
1.3. Purpose
The purpose of this thesis is to find out main strategic determinants, which firms should focus in the software industry.
1.4. Delimitations
Due to time and resource limits of this study, the research concentrates only on the software industry. More specifically, companies that are selling a software product have been chosen, which means that software consultancies are excluded. The main reason for this is that there is a distinct difference between developing and consulting firms, which are involved in software industry. Software companies are selling products, while consulting firms are providing knowledge. However, software firms are involving in different kind of products (e.g. Business, Communications, Games, Graphics, Operating Systems, Programming, Recreation, Utilities), in this study it was not considering to choice of firms, which kind of products are selling. The
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main reason is that all the software companies are mainly technology oriented and it is assumed that type of business will not make any difficulty to identify the main strategic determents.
This thesis is concerning the network level, corporate level, business level and functional level of a corporation. However, the relation between the topic and the specific levels will not be explicitly described. The reason for this is to be found in the nature of the internal environment. The internal environment is applicable to all levels and it is therefore not possible to link the internal environment to one particular level. The organizational culture, for instance, is a part of the internal environment, which is difficult to link to one particular level. The organizational culture, for instance, is influencing the network level when finding the network partners, the corporate level when determining which industries to enter and the functional level as guidelines for employees' behavior.
The strategic determinants are in many ways related to the strategic process. Strategic process can basically be divided into intended and emergent strategies. The main argument for ignoring the discussion of strategic process is that it involves another dimension than the discussion of strategic determinants.
1.5. Target group
The task of this section is to identify who would benefit from reading this thesis. Instead of naming a specific target group the objective is to point out the fundamental requirement that will increase the joy of
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reading it. The central issue of this thesis is strategy. However, this thesis will only reflect and explain a small part of strategy. In order to get most out of this thesis, the reader should be able to place the research within the wider aspect of strategy.
It is expected that the finding of the thesis will help to readers to know about the main strategic determinants in the software industry. It has been expected that software firms, and students of university can be benefited from the finding of the thesis.
1.6. Readers guide
The thesis has been written on some general assumptions. These are-
• The readers have the basic knowledge in the field of business
strategy.
• There are no significant differences between the terms of
strategic factors, forces, elements or actors. However, the term of determinants has been use to understand the relation between the factors.
• The technology is a factor, which belongs to both external and
internal environment, however the technology is considered as firm's internal resource when the technology has only owned by a firm and the overall development of technology has considered as external factors.
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2.
Theory of science and methodology
When doing scientific research, it is crucial to document the basic view of the researchers and their research approach. Both can have a significant impact on the result of a study. The problem is that there is no right way of doing research, however, there are certain rules that can improve the reliability and validity of a study. This chapter aims to present the thinking, reasoning and deciding upon scientific and methodology matters. The reader should keep the view of science and choice of methodology in mind when reading this thesis.
2.1. Research position
The individual perspective of reality is influenced by the way an individual perceives its surroundings. There are probably no two individuals who are identical and therefore each individual perceives and interprets its surroundings, reality, in different ways. The individual perspective of reality is influenced by its beliefs, values and norms (Eriksson and Wiedersheim-Paul, 1999). These values and norms are influenced by upbringing experiences and education etc.. In this way the objective reality turns into subjective understandings. However, there are times when the subjective understandings convert towards the same understandings and therefore build clusters of shared understandings. The basic perspective of this research is that these clusters form what human beings regard as the "truth". In this way reality is socially constructed.
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The definition of a paradigm is closely related to the clusters of truth. "Paradigms represent fundamental ways of viewing and interpreting the reality. Paradigms are webs of explicit or implicit meta-theoretical assumptions shared by a group of theories that bind their work together" (Elfring et al., 1995, p.31). There are two paradigms widely accepted in the philosophy of science: positivism and hermeneutic (Andersen, 1994).
From the positivistic point of view measurability, validation and quantitative methods play a central part in the research work and the paradigm is based on the natural sciences. (Elfring et al., 1995). Positivism is built on the belief that there is an objective reality and scientists should aim to find this true reality and further develop simplified concepts and models to explain this reality. It assumes that social reality is independent and existent. The research work can be done by observation and collection of empirical data, for that reason research results are precise and secure and generate conclusion as laws.
From the hermeneutic point of view paradigms can be translated into science of interpretation. The hermeneutic procedure presupposes that a complete understanding of courses of events is possible by interpreting. The ability to interpret reality depends on the beliefs and values of the subjective and participative investigator.
The fundamental assumption is that beliefs, values and norms of a person are influencing the way that observations are interpreted; that
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suggests to follow a hermeneutic paradigm. Throughout this study different theories underlying the investigation have been considered, which has in fact influenced the data collection. This study aims to stay as objective as possible. Eriksson and Wiedersheim-Paul (1999) calls this limited objectivity, which means that the researcher tries to eliminate sources of subjectivity.
2.2. Research approach
The goal of this thesis is to find out what determines the strategy of firms in the software industry. The problem statement implies both describing and understanding these determinants. In this way this research could be said to be both a descriptive and an explanatory study. The study is descriptive because it will reveal condition, characteristics of the investigated area. However, purely descriptive studies offer no explanation of why the conditions and characteristics occur (Lekvall and Wahlbin, 1993). The goal of an explanatory study is to answer why phenomena occur (Lekvall and Wahlbin, 1993). The combination of descriptive and explanatory study should therefore provide what the phenomena are and why they arose. Closely related to the discussion of how deep and broad a research should be is the choice between case studies and cross section studies. In a case study, the researcher does a detailed and profound study of one single case, unlike cross section study where he studies a few variables in many different cases (Lekvall and Wahlbin, 1993). In this research both fits and it is not purely followed either case study or cross section study. The time dimension of this thesis represents a snapshot of one point in time.
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2.2.1. Deduction vs. Induction There are in general two ways of conducting a research, inductive or deductive. Inductive is when general rules are derived from a particular observation. When conclusion is drawn from logical reasoning based on empirical studies it is said to be a deductive research. The difference is that the former creates the general rule, whilst the latter uses the existing rule to draw final conclusion (Ghauriet al, 1995) (see Figure 2.1).
Figure 2.1 - Deductive and Inductive approach
Theory
Deduction
Reality
Induction
Source: Eriksson and Wiedersheim-Paul, 1999, p. 218
The investigation of this study aims to identify patterns of actions in the collected data. These observations will lead to a theoretically based discussion of the topic - an inductive approach. However, understanding of well-established theories influences both the empirical research and the analysis. It is therefore not a purely
inductive study. The research's approach seems to be more abductive. According to Alvesson and Sköldberg (1994) abduction is when a researcher starts with a problem statement, researches the literature on the topic, does an empirical investigation and finally ends with the theories again.
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Strategic Determinants in the Software Industry
2.2.2. Qualitative vs. Quantitative Another fundamental distinction can be made between qualitative and quantitative approaches. Which methodology is used depends on what is ought to be investigated. Qualitative methods are often used when it is not meaningful to express the collected data in numbers. A quantitative method, on the other hand, would imply that the collected data can be expressed in numbers and analyzed with statistic tools (Lekvall and Wahlbin, 1993). There are several reasons to choose qualitative research approach. Firstly, it is our goal to gain a deeper understanding of the topic. According to Kvale and Torhell (1997) the primary task of the qualitative method is to gain a deeper understanding of a phenomenon. Furthermore, the abductive approach is too broad to be kept within the frame of a quantitative survey. Thus there is a probability that respondents are providing information beyond asked questions. Hence, it is difficult to capture the explanations why firms act like they do with a quantitative method. Due to these assumptions a qualitative approach helps to avoid subjectivity. Whereas a quantitative research might be less subjective in the interpretation of the results, it would be very subjective as to what is being asked.
2.3. Research method
The central issue of this section is to document how the investigation is executed. The main task is to gather data. There are two types of data sources, primary and secondary. Primary data is mostly gathered for the specific research. Examples of primary data sources are observation and interviews. Secondary data is collected and compiled
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for other purposes. Examples of secondary data sources are Internet, books, articles and annual reports.
2.3.1. Primary data As mentioned in the research approach section, the goal of this thesis is to describe what the firms are doing and to explain why they are doing it. According to Eriksson and Wiedersheim-Paul (1999), interviews are the best data collection method when the researcher wants to observe the respondent and to get a deeper understanding of a particular topic. Therefore, to collect primary data interviews have been used. However, interviews can be made personal or via other electronic mediums, e.g. telephone, postal or electronic mails (Cooper & Schindler (1998). The greatest advantage of the personal interview lies in the depth and the detail that can be secured. Furthermore, the interviewer has more control than with other kinds of interrogation - it is possible to secure the correct respondent, adjusting the language, show visual materials and observe the interviewee in general (Cooper and Schindler, 1998). Personal interviews were therefore the first choice. However, in one case it was not possible to do a personal interview and therefore a telephone interview was conducted.
Interview
There are three types of interview that can be conducted: structured interview, semi-structured interview, and unstructured interview. In the structured interview researchers emphasize fixed response categories and systematic sampling and loading procedures combined
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Strategic Determinants in the Software Industry
with quantitative measures and statistical methods. Unstructured interviews give the respondent almost full liberty to discuss reactions, opinions and behavior on a particular issue. The semi-structured interviews differ from both unstructured and structured interviews. They differ from unstructured interviews because the topics and issues to be covered, and the people to be interviewed and questions to be asked have been determined beforehand, but in a more flexible way than the structured interview (Ghauri & Grønhaug, 2002).
The semi-structured interviews were chosen for this thesis because it enables the observation of new discoveries within the borders of the research topic. Again, it reflects the abductive nature of this thesis. The interview guide is a basic framework for the interviewed questions. The aim was to start a dialogue more than going through the questions step by step.
Since strategy is a vital part of a company's success it was decided to keep all participants anonymous. This turned out to be a wise decision because some of the participants were main competitors to each other.
Sample The software industry is the chosen industry of this thesis. More specific, firms in Sweden that deliver software solutions for other firms based on more or less package software. The main argument for this choice is the limited resources of this research. However, it was considered to keep a balance between big and small films. The main reason behind this choice is to identify the main strategic determinants
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in the software industry without considering the firms resources. Another reason of that choice is that if the balances between two types of companies are not considered the result may not be as proper as expected. Therefore, following criteria were used to find firms to contact:
• Firstly, the companies are divided into two groups. The basic
idea was to compare companies who have an extensive resource base with firms who have a very limited resource base. The criterion used for dividing the companies was number of employees. However, the distinction is a sliding scale and therefore it is of little value to name static numbers that represents one group or the other. Instead the chosen companies who clearly represent the lower or upper half of the scale. It is assumed that a distinct difference is the basis of a good analysis. The goal was therefore to investigate companies with less than 10 employees to represent the limited resource group and companies with more than 500 employees to represent the extensive resource group. However, the numbers of employees of three small companies (S1, S2, S3) are 6, 4, and 6 respectively, which are participated the interviews. It is difficult to find software producers with more than 500 employees in Sweden. Using a list of the 500 biggest IT-companies in Sweden however only 3 companies matched the demands (http://skolan.presstext.prb.se). Of these 3 companies 2 are participating. It is difficult to argue for patterns with only two companies. Therefore, a third company has been included. However, the numbers of the three big companies (B1, B2, B3)
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Strategic Determinants in the Software Industry
are 3400, 3200 and 9000 (50 employees in Sweden) worldwide respectively. Although the Swedish subsidiary is answering the questions on behalf themselves and has its own development; there are aspects where the company is viewed as one. Most importantly the customers view the company as the worldwide company and not the Swedish subsidiary.
• Secondly, only the software companies which are involving in
sales and development/production of software products are included in the present study, the main reason behind this choice is that it assume that other type of companies (e.g. consultancy firms) are not effected by the wide aspect (all) of strategic determinants.
• Thirdly, the companies had to compete with a product on the
open market. This criterion was set to make sure that the company had customers and competitors. There might be a risk of getting biased answers from companies without customers and competitors.
• Finally, in order to do personal interviews, the software
companies should be within an acceptable distance.
Selection Upon having sampled a group of possible companies to interview, the companies were contacted by telephone. By explaining the purpose of this thesis persons have been connected who could answer asked
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Strategic Determinants in the Software Industry
questions. The position of the persons varied among the companies. It is therefore not possible to select one position that should have fitted all companies. It was assumed that the employees of the companies know if they are able to answer the asked questions. Moreover, it was emanated that the difference in position has a negative impact on the result. All participants have been working with the company over a long period and through their experience within the company they had gained the necessary knowledge to answer the questions.
It is always difficult to determine the number of interviews necessary to attain validity. Through telephone conversation with the software companies an impression was received that the first response on the research area was very similar. This impression turned out correct. The interviewee's had very similar answers the questions. The tendencies and patterns in the answers therefore suggested that further investigations could be stopped. This corresponds to Ghauri and Grønhaug (2002) who argue that the researcher continues the procedure until no new opinions are uncovered. In qualitative research the purpose is to understand, gain insights and create explanations (Ghauri and Grønhaug, 2002). All in all six interviews have been conducted in six different companies. It is more important to get variety in the group of companies rather than many interviews in one company. Furthermore, the process of finding the most suitable person in the companies would imply that if other persons in the company would have been interviewed, they might not have been as capable as the primary person. This could lead to misleading results. Moreover, it was a concern that the position of the interviewee' is a crucial issue for the topic of this thesis. All the six interviewees are working in the top
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Strategic Determinants in the Software Industry
position in their company, who are familiar with the strategic matters. The working position of these interviewees (when the interviews ware conducted) were product director, professional service division manager, chief of administration in three big companies and the interviewees' position in the small companies were CEO, managing director, and CEO -chairman of the board.
Execution All respondents received a very short description of the investigation and the interview guide at least one day before the interview. The supervisor of this thesis approved the interview guide before sending it to the companies. To avoid leading the respondents, intentionally the research area was not explained in depth and, as mentioned before, the interview guide was not very detailed. It was assumed that the quality of the responses would improve if the respondent would receive both beforehand.
All interviews but one telephone interview were held in conference rooms. All interviews lasted between 30 minutes and 80 minutes. Before starting the interview it was assured that the interviewee and the interview would be held confidential. Additionally the respondent was informed that the interview would be recorded on a micro cassette recorder. Recording the interview gives the possibility to concentrate on the topic and the dynamics of the interview (Kvale, 1996). "The words and their tone, pauses, an the like, are recorded in a permanent form that can be returned to again and again for re-listening, however, It does not include the visual aspects of the situation, neither the
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setting nor the facial and bodily expressions of the participants" (Kvale, 1996, p.160-161). Furthermore, it is difficult to make sure that the recording is audible. Mumbling or background noise like traffic coffee cups and the like hitting the table could make post recording transcription difficult. To avoid these pitfalls, notes have been taken in addition to the micro cassette recording. In order to analyze the interviews the taped interviews were transcribed into written texts.
All interviews were conducted in English, but all respondents were Swedish. There is a risk that language barriers might distort some of the messages of respondent. However, all respondents gave no impression of having difficulties expressing themselves and their ideas.
The interviews started asking easy and formal questions to the respondent. The respondents were deliberately not informed in depth about the research area until the end of the interview. This choice was made to influence the respondent as little as possible. During the interview it is important not to lead the respondent. It might be that formulation and the tone of the interviewer influences the respondent. The questions were therefore often asked from different angles. It was decided that one person did all the interviews while the other took notes and made sure that the interviewer did not forget important aspects. As the interview moved along, the questions gradually became more complicated. The purpose of this procedure is to develop a confidence and understanding between the interviewers and respondent before going into the more complicated matters.
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At the end of the interview the respondent was informed about the research in detail, which often lead to further discussion. However, none of the respondents did change their statements.
2.3.2. Secondary data Secondary data can be collected in a number of different ways. Regardless what kind of source is used it is very important to consider precision, validity, reliability and relevance of the data in relation to the purpose and problem statements of the research (Lundahl and Skärvad, 1999). The majority of secondary data was collected through books, often from libraries and articles from public databases. The use of the Internet as a source is dramatically increasing, but it is difficult to establish validity and reliability of Internet pages and the source of data should therefore be examined carefully.
2.3.3. Reliability and Validity The previous sections should have introduced the reader to the underlying scientific assumption and the conduction of this study. This final section will concern the reliability and validity of the investigation. It is important to emphasize that the reliability and validity is not a final verification of the investigation. Reliability and validity has been built into the research with continual checks on both. Reliability A study with high reliability is recognized by the fact that the research findings can be replicated. A problem arises because qualitative
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research is highly contextual, meaning that information gathering is a function of who gives it and how skilled the researcher is at getting it. Furthermore, the world is in constant flow, which makes it impossible to repeat the exact same investigation twice. Therefore, the term reliability in the traditional sense seems to be something of a misfit when applied to qualitative research (Merriam, 1998). To avoid this Merriam (1998, p.206) suggests that "Rather than demanding that outsiders get the same results, a researcher wises outsider to concur that, given the data collected, the results make sense. The question then is not whether findings will found again but whether the results are consistent with the data collected." By describing in detail how the data was collected (Chapter 2), explaining the view on the underlying theories for analysis (Chapter 5) and presenting the empirical data (Chapter 4) the reader should be able to judge whether the results (Chapter 5 and 6) are consistent with the data collected. Research findings can be repeatedly wrong. Merriam (1998, p.205206) gives the following example of the relationship between reliability and validity: "A thermometer may repeatedly record boiling water at 85 degrees Fahrenheit (app. 30 degrees Celsius, red.); it is very reliable since the measurement is consistent, but not at all valid." This leads to the next section on validity.
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Validity Internal validity Kvale (1996) states that "validity refers to the truth and correctness of a statement" (p.236) and that "validity pertains to the degree that a method investigates what it is intended to investigate" (p.238).
Throughout the sections on primary and secondary data collection it has been documented how the research was done. The reasons for the research will therefore not be repeated here. It should be emphasized that the research procedure was not coincidental but follows research methods found in generally accepted literature on research studies. By doing so, this study has gained high internal validity.
External validity According to Merriam (1998, p.207) "external validity is concerned with the extent to which the findings of one study can be applied to other situations." The task is to find out whether the results of a study are generable (Kvale, 1996, Merriam, 1998). Internal validity is a prerequisite for external validity. "There is no point in asking whether meaningless information has any general applicability" (Guba and Lincoln in Merriam, 1998, p.207).
The sampling, selection and execution of this study shows that the aim of this thesis is not to provide statistically valid result. The sampling and selection of participants is non-random and the number of interviews too low. The reason for this decision lies in the previous
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mentioned goal of gaining a deeper understanding of a specific sample. In other words this study does not claim to find out what is generally applicable in the software industry. Merriam (1998, p. 1998) argues, "In qualitative research, a small non-random sample is selected precisely because the researcher wishes to understand the particular in depth, not to find out what is generally true of the many." However, this does not imply that the result is of no general use. Firms who are similar to the ones in the sample might very well gain insight by reading the result.
The results might be widely acceptable through analytical generalization. "Analytical generalization involves a reasoned judgment about the extent to which the findings from one study can be used as a guide to what might occur in another situation. It is based on an analysis of the similarities and differences of the two situations. By specifying the supporting evidence and making the arguments explicit, the researcher can allow readers to judge the soundness of the generalization claim. This is also referred to as assertational logic" (Kvale, 1996, p.233). As mentioned in "reliability" section, the first paragraph of this thesis aims to give the reader a result that makes sense, based on the data collected. This should also provide a basis for future analysis of similarities.
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3.
Frame of reference
In deciding an organization's future strategy the strategist must analyze the organization's external and internal environment (Hill and Jones, 1989; Byars et al., 1996; Grant, 1998; Johnson and Scholes, 1999). A prerequisite for analyzing the external and internal environment is to know what the external and internal environment is. The literature on both environments is exhaustive. Therefore, the main aim of the following descriptions is more to present the main areas of concern in both environments than giving a detailed description of them. It would, however, be difficult to understand the environments without any explanation, which is why some dominating views are presented. Section 3.1 and 3.2 will introduce the reader to what is considered being the external and internal environment and why a firm focuses on one environment or both. The goal of this chapter is to present a balanced view on the external and internal environment as a source of superior performance.
3.1. The external environment
In order to analyze the external environment as a source of superior performance it is valuable to understand what the external environment is. Hence, it will start with a description of the different levels of the external environment. However, every company interprets the external environment in their own individual way (Byars et al.,1996; Johnson and Scholes, 1999).
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3.1.1. Macro environment The macro environment includes general forces that are felt in many industries (Hill and Jones, 1989). These can be classified as political, economic, social cultural, and technological (Byars et al.,1996; Johnson and Scholes, 1999). The analysis of these forces is often referred to as PEST analysis. Hill and Jones (1989) and Grant (1998) add demographic and global factors to the PEST analysis. Some examples of political forces are hiring and firing of employees, compensation, working hours, and working conditions. Laws can influence advertising practices, the pricing of products, and corporate growth by mergers and acquisitions. Taxes directly influence the financial structure and investment decisions of organizations (Byars et al. 1996).
The local, national, and world economic forces can influence business in many ways. Byars et al. (1996) argue that it is important to make a separate assessment based on organizational scope. Examples of local economies are wage rates, unemployment, disposable income. On the national level, trends in growth, income levels, inflation, balance of payments can influence the earnings of an organization. On the other hand, international economy can be dividend into different categories of nations with similar economic situation. A good example of how economics of the macro environment can affect business is the burst of the so-called "it-bubble" around the millennium. As the stock market for information technology started to drop rapidly, so did the economy throughout the world.
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Strategic Determinants in the Software Industry
Values, attitudes of customers are social forces. These forces have a significant influence on the demand of a product or service. Due to this fact they are valuable to consider when deciding a strategy.
Technology includes not only inventions that revolutionizes live but also the slow improvements in methods, in materials, in design, in application, in diffusion into new industries, and in efficiency (Argenti in Byars et al., 1996).
Demographic changes refer to the change in population. Some organizations might be very dependent on the size of the population, such as health care and educational institutions.
Changes in the global environment can have an immense impact on the both local and international markets.
The task of a firm is to forecast these forces. It should be noted that the nature of these forces is so complex that it is impossible to make an exact prediction. The task is therefore more to get a basic understanding of what is driving the change of the forces and how they affect the organization (Johnson and Scholes, 1999).
3.1.2. Industry The analysis of the macro environment should give a basic understanding of the broad aspects of the environment. The next level of analysis is the industry. An industry is defined as a group of firms
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Strategic Determinants in the Software Industry
offering similar products or services (Hill and Jones, 1989; de Wit and Meyer, 1998).
According to Grant (1998), the structure of the industry determines the attractiveness of an industry. Therefore, the task facing the strategic managers is to analyze competitive forces in the industry environment (Hill and Jones, 1989). In practice there are many factors of an industry that influences competition and the level of profitability. Porter, however, has developed a widely used framework that enables managers to do this (Grant, 1998). This framework is known as the Five Forces of Competition. The five forces of competition are new entrants, buyers, suppliers, substitutes, and rivalry (see Figure 3.1).
Figure 3.1 - Five Competitive Forces
New entrants
Threat of New Entrants
Suppliers
Bargaining Power of Suppliers
Industry Competitors
Bargaining Power of Buyers
Buyers
Rivalry
Threat of Substitutes
Substitutes
Source: Porter, 1985.
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Strategic Determinants in the Software Industry
New entrants to a market is an threat for existing companies, because most commonly they bring a new production capacity, they desire to establish a secure place in the market, and sometimes they also have substantial resources to compete. New entrants have significant influence on price-costs-profitability (Porter, 1985). New entrants are not only a threat to firms in an industry but also have a possibility that affects competition. Theoretically, any firm is free to entry and exit in an industry. However, when firms are able to high profitability in an industry, they usually inhibit additional rivals from entering the market (Rue and Holland, 1986). Entry barriers are unique industry characteristics. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage.
The number of potential buyers (customers and consumers) as well as their needs, tastes, and preferences are major source of threats and opportunities in the competitive environment (Rue and Holland, 1986). The power of buyers is the impact that customers have on a producing industry. There is a significant relationship between buyers and markets, when buyer power is strong the market becomes a "monophony" - a market in which there are many suppliers and one buyer. Whether seller-buyer relationships represent a weak or strong competitive force depends on bargaining leverage and price sensitivity. Buyers have substantial bargaining leverage when buyers are large and purchase a sizable percentage of the industry's output.
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Strategic Determinants in the Software Industry
Typically, purchasing in large quantities gives a buyer enough leverage to obtain price concessions and other favorable terms.
A producing industry requires raw materials, labor, components, and other supplies. When suppliers are powerful, they can influence on the producing industry, such as selling its raw materials at a high price expropriating some of the industry's profits. The ability of suppliers to influence price or quantity on an industry, supplier is a key variable in the competitive sector (Rue and Holland, 1986).
According to Porter's five forces of competition framework, substitute products refer to products in other industries the threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A close substitute product constrains the ability of firms in an industry to raise prices. Firms in one industry are quite often in close competition with firms in another industry because their respective products are good substitutes (Thompson and Strickland, 2001). The competition engendered by a threat of substitute comes from products outside the industry.
An industry is a group of organizations producing same types of products or services, they contend in battle with each other for market share and that is called rivalry. Rivalry is usually makes in price wars, advertising barrages, and product proliferation. Rivalry is costly for the firms but consumers could be beneficial because they get better prices, more products or service information, and more product variety (Rue and Holland, 1986). In some industries, cross-company
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Strategic Determinants in the Software Industry
rivalry is centered on price competition to offer buyers/consumers the best (lowest) price. (Thompson and Strickland, 2001). Before leaving the industry environment it should be mentioned that Porter's Five Forces of Competition framework is not without its critics. However, the critics are mainly focusing on the assumptions lying behind the model and not on the five forces them selves, one such is that Porter sees all business interactions as competition. Adam Brandenburger and Barry Nalebuff, in their book called "coopetition", introduced duality of competitive/cooperative of business relations (Grant, 1998). The new player was called a complementor. "A complementor is the mirror image of a competitor. On the demand side, they increase the buyers' willingness to pay for product; on the supply side they decrease the price that suppliers require for their inputs "(Ghemawat, 2001). Since the other theories are not expanding the factors presented in Porter's Five Forces Framework they will be presented in the section on superior performance in the external environment.
3.1.3. Market segmentation According to Grant (1998) and Porter (1985) it is useful to partition an industry into segments if the nature and intensity of competition varies among the different sub-markets that an industry serves. This is referred to as market segmentation. "In the business world a market is usually defined as a group of customers with similar needs" (de Wit and Meyer, 1998, p. 334). market is defined as An essential step of segmentation is to determine the basis of segmentation. Segment
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Strategic Determinants in the Software Industry
decisions are essentially choices about products and customers. The question is what characteristics of the buyers or of products that makes the most distinctly partition of the market (Grant, 1998). Porter (1985) states that profitability of the market segment is influenced by the same forces as those of the industry as a whole. The five forces model can therefore by applied to the market as well. There are, however, a few differences. First, there are differences when analyzing the pressure of competition from substitute products in a market. In markets not only the substitutes from other industries, but more importantly, substitutes from other segments are taken into consideration. Second, the majority of new entrants will be from other segments within the same industry. As in the strategic group analysis, mobility barriers hinder a switch from one market segment to another to mobility.
3.1.4. Strategic group The boundaries of an industry are often very broadly defined (Grant, 1998). Therefore, it might be that a company theoretically can exist in more than one industry. Looking at what industry a firm is operating in will therefore turn out little fruitful. In such cases it can be useful to identify organizations with similar strategic characteristics, following similar strategies or competing on similar bases. This is referred to as strategic group analysis. A strategic analysis can help identify the immediate competitors and what they are focusing on. Some strategic groups have positional advantages in Porters five forces framework (see section Industry). These strategic groups could then be viewed as desirable goals for non-group members. The problem is that firms
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Strategic Determinants in the Software Industry
who are switching strategic group often face costly barriers to mobility (Hill and Jones, 1989).
Whereas an analysis of the external environment should provide information about the competitors and what the customers want, an analysis of the internal environment should clarify what the firm is and what it is able to do.
3.2. The internal environment
The internal environment is the firm's internal resources, capabilities/competences, which are the strength of a firm (Johnson and Scholes, 1999). Before describing the internal environment there are a couple of views that should be taken in consideration:
Firstly, the literature on which parts of the internal environment that influences the strategy is rather convergent. Basically it can be divided into three parts; Strategy -firms' purpose, Resources / Capabilities / Competences, Structure and Systems (Hill and Jones, 1989; Grant, 1998; Johnson and Scholes, 1999). The order of appearance between the internal environment and strategy formulation, however, differs in the literature. While it is basically agreed upon that the strategy formulation is based on organizational goals and a rational analysis of external environment and internal resources and capabilities, it is discussed when to take the structure and systems into account (Grant, 1998). One view is that structure follows strategy. Once formulated, the next step is to choose an appropriate structure and tailored systems (Hill and Jones, 1989). Another view is that structure and systems
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should be taken into account when analyzing the resources and capabilities (Grant, 1998). Backed up by the exhaustive literature on the difficulties of organizational change this is correct as assumed. Therefore, the structure and systems can be categorized as a part of the intangible resources of a firm.
Secondly, even though there is a wide research on resources, capabilities, there seems to be no general accepted way of how to distinguish them (de Wit and Meyer, 1998). Some authors say that resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. (Barney 1991; de Wit and Meyer, 1998). Others, like Grant (1998), argue that resources should be divided from capabilities and competences. For these authors resources are not productive on their own. It is the capabilities, which are interaction between resources that makes them productive (Grant, 1998). Johnson and Scholes (1999) agree with Grant (1998) that the resources are not productive on their own, but what Grant (1998) calls capabilities, is called competences by Johnson and Scholes (1999). According to Prahalad and Hamel in Grant (1998, p: 118) the literature uses the terms "capability" and "competence" interchangeably. Both capabilities and competences will be
represented in the following. However, it is very logical to make a distinction between what is not productive by itself and what is a direct capacity for undertaking productive activity. This section will therefore be dividend into resources and capabilities/competences.
Finally, analyzing the internal environment is not only considered as a task of looking at what is inside the firm, but to look at what can be
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controlled by the firm. A good example of this is the relationship with other firms. A relationship does not belong to one firm. It is dependent on all participants of the relationship. However, in most cases, the firm can control whether or not it should continue the relationship, i.e. directly control.
3.2.1. Strategy - firms' purpose According to de Wit and Meyer (1998) strategy is a course of action for achieving an organization's purpose. The purpose expresses the reason why an organization exists. Purpose can be expressed through mission, vision, and goals statements. Fundamentally, the purpose of a firm can be divided into two: shareholder and stakeholder.
3.2.2. Resources The resources are the own individual resources of a firm. These resources are often not able to be productive on their on. It is usually the combination of resources that makes them productive. The resources can be divided into tangible, intangible, and human resources (Grant, 1998; Johnson and Scholes, 1999).
Tangible resources Tangible resources can generally be dividend into financial and physical resources (Grant, 1998). Examples of physical resources are buildings, machines, and production capacity. Financial resources include sources and use of money, such as obtaining capital managing
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cash, the control of debtors and creditors, and the management of relationships with suppliers of money (Johnson and Scholes, 1999). These resources are the easiest to identify and evaluate because they are usually listed in the firm's financial statements (Grant, 1998). However, to do an assessment of the physical resources the firm must look beyond the mere listing of buildings, machines, and production capacity. Questions about where the resources located, what their capacities are, the age and type of equipment can determine how useful a physical resource really is (Johnson and Scholes, 1999; Grant, 1998). Furthermore, it might be that some physical resources have historical value that goes beyond what is listed, such as an old movie library etc.
Human resources "From a resource-based view, human resources are the productive services human beings offer the firm in terms of their skills, knowledge, and reasoning and decision-making abilities" (Grant, 1998: p. 116). In other words, of course human beings are tangible just like buildings and machines, but it is not the tangible functions that are important for the firm. That means that the human resources can be classified as tangible and intangible of a firm. The best way of increasing the value of the human resources is by education and training.
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Strategic Determinants in the Software Industry
Intangible resources The intangible resources are more difficult to identify than the tangible resources. Nevertheless, intangibles are playing a crucial role of a companies value. The gaps between the book value and the stock market value are a clear evidence of this. Companies with the highest valuation ratios tend to be technology-based companies and companies with very strong brand names (Grant, 1998). The main problem is to find the "real" value of the intangible resources.
Reputation is an intangible asset because it creates confidence in customers and suppliers. Brand value, for instance, is a reputation asset. Consumers chose a branded product over an unbranded or unknown brand (Grant, 1998). The reputation can also be linked to the company itself.
Technology is another important category of the intangible resources is technology (Grant, 1998). Technology can be grouped in proprietary technology and expertise in the application of technology (Grant, 1998). Proprietary technology is patents, copyrights, etc. and is protected by law. The expertise in the application of technology is also referred to as company-owned know-how. Relationships with customers, competitors, or suppliers are intangible resources that have gotten increased attention during the past decade. Exhaustive literature on customer relationship management, coopetition, and supply chain management has proven the impact of these resources on firm performance.
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The ability of employees to harmonize their work efforts and integrate their separate skills may depend not only on the interpersonal skills but also the organizational context. This organizational context is also referred to as the organizational culture, which can be the values, traditions and social norms or an organization (Grant, 1998).
As mentioned above it is valuable to take the structure of the organization into account before deciding upon a strategy. The different combinations of structures will not be presented here. The important message is that different structures might be more or less appropriate for different kinds of organizations. An example of conflict is if the structure of the organization is suitable for simple tasks, whereas the strategy of the organization is demanding complex tasks.
3.2.3. Capabilities/competences Resources are usually not able to be productive on their own, i.e. adding value to the customer single-handed. It is deployment of resources into capability or competences that makes them capable of undertaking a particular productive activity.
3.3. Sources of superior performance
After having taken a look at what the external and internal environment it is time to take a closer look at which parts of the
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Strategic Determinants in the Software Industry
environments are sources of superior performance1. Fundamentally there are two ways of attaining this goal. First, a company may locate in a context where favorable conditions result in higher profitability. Analysis of the macro environment and Porter's Five Forces of Competition framework can be used to identify such a context. Second, a firm may seek to establish a position of competitive advantage for the firm. Sustainable competitive advantage is a central source of superior performance (Coyne, 1986, Grant, 1998). However, to find the sources of sustainable competitive advantage, it should be defined what it is. Grant (1998, p.174) defines competitive advantage as:
"When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit)".
There are three conditions that have to be met in order for competitive advantage to be meaningful (Coyne, 1986):
• The customers perceive a consistent difference in important
attributes between the producer's product or service and those of his competitors.
• The difference is the direct consequence of a capability gap
between the product and his competitors.
1
Performance as profits that can be traded into profitability, investments in 37
market share or technology, customer satisfaction, employee benefits, etc.
Strategic Determinants in the Software Industry
• The difference in important attributes and the capability gap
can be expected to endure over time. Basically, there are two types of competitive advantage that a firm can possess: low cost or differentiation (Porter, 1985). Delivering the same product or service at lower cost can is referred to as low cost advantage. Differentiation advantage is obtained if the customer is willing to pay a premium price that exceeds the cost of differentiation.
The question is whether firms can attain superior performance by analyzing the external environment, analyzing the internal environment or both. The following sections on the external environment and internal environment will take a closer look at which environment is a potential source of superior performance.
3.3.1. The external environment Companies that are adopting an external environment perspective should continuously take their environment as starting point when determining their strategy (de Wit and Meyer, 1998).
Macro environmental factors are influencing the level of demand within an industry and are therefore directly affecting company profits (Hill and Jones, 1989). As these factors change the strategic management must understand the impact on their company and the opportunities and threats it faces. The macro environment is affecting the performance of the company. The problem is that the macro environment is very broad and it would therefore be very expensive to
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Strategic Determinants in the Software Industry
do an extensive analysis. However, by focusing on an industry or market segment a firm can narrow the scope and determine which of the macro-level influences are important for the firm (Grant, 1998).
Five forces of competition According to Porter (1985), the fundamental determinant of a firm's profitability is industry attractiveness. Porter's five forces of competition are based on the economic research in the field of industrial organization (IO) (Ghemawat, 2001). This research explored the structural reasons why some industries were more profitable than others. By analyzing the five forces of competition a firm could determine the attractiveness of an industry. The five forces influence profitability because they influence price, costs and required investment of firms in an industry. A firm can shape the industry structure and is therefore not a prisoner of its industry's structure. The task of a firm is therefore not only to pick the right industry and understand the five forces better than competitors (Porter, 1985).
Market orientation "Market-oriented businesses are committed to understanding both the expressed and latent needs of their customers, to sharing this understanding broadly throughout the organization, and to
coordinating all activities of the business to create superior customer value" (Slater and Narver, 1999, p. 1167) . Market orientation is continuously scanning the market for sources of superior performance.
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Strategic Determinants in the Software Industry
In addition to the customer orientation a market oriented firm must also be competitor oriented. "Competitor orientation means that a seller understands the short-term strengths and weaknesses and longterm capabilities and strategies of both the key current and the key potential competitors" (Narver and Slater, 1990, p.22).
Finally, it should be noted that the "market orientation concept is focusing on the internal environment as the primary source of success (Kohli and Jaworski, 1990; Slater and Narver, 1999). When a firm follow the market orientation that also means the firm focus on external environment in this point of view.
PIMS A very different perspective on how to gain competitive advantage is the observed relation between market share and profitability. Market share and profitability are deeply interconnected and there have significant relation between these two things (see Figure 3.2).
Figure 3.2 - PIMS
Return on investment (ROI)
Relative Market Share (RMS)
Source: Own based on Buzzell and Gale, 1988 40
Strategic Determinants in the Software Industry
Researchers found this relationship may different in considering different kind of industries, different time periods, and as well as various parts of the world (Buzzell and Gale, 1988). Having a large market share, an organization can get some extra benefits to control over market and they are able to provide better value and realizing lower costs to its customers. "Under most circumstances, enterprises that have achieved a large share of the markets they serve are considerably more profitable than their smaller-share rivals" (Buzzell and Gale 1988, p.367). According to Buzzell and Gale (1988), the PIMS database is the world's most extensive and detailed source of information. They argue that, major companies like IBM, Gillette, Kellogg, and Coca-Cola, are enjoying strong competitive positions in their primary product markets and these are highly profitable. According to them, there are mainly four possible reasons to have a link between market share and profitability.
First reason is the Economics of scale. If an organization has a large market share it can achieve "achieved economies of scale in procurement, manufacturing, marketing, R & D, and other cost components"(Buzzell and Gale 1988, p.369). And that is also help to achieve more efficient methods of operation within a particular type of technology. According to Porter ( in Buzzell and Gale, 1988) shareprofitability relationship is 'U-shaped' (high on both ends and low in the middle) in most of the industries. The small and large share business typically earn high rates of return but the medium-share business are fail to get such advantages, he called as 'stuck in the middle' (Buzzell and Gale,1988, p.373).
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Strategic Determinants in the Software Industry
The second reason is "Risk aversion" by customers. A achieved market leadership position, risk-averse buyers may favor its products because they don't want to take the chances sometimes associated with buying from a smaller-share competitor. This type of customer behavior can also help an organization to be more profitable.
The third reason is "Market power". If an organization have large market share that also means that somehow it have the control over the market. Their size permits them to bargain more effectively, administer prices, and in the end, realize significant higher prices for a particular product.
The fourth reason is "a common underlying factor". Large market share also helps a organization to achieve the quality of management. If an organization has skillful managers that also means that the have the skill in controlling costs, getting maximum productivity from employees.
These all are not always active in all industries together; but according to the PIMS logic, an organization starts its business from quality and in the long run, it achieves low cost position.
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Strategic Determinants in the Software Industry
Figure 3.3 - The Share-Profitability Relationship
Superior relative quality Premium Prices + Market Share Scale and/or Experience cost Higher Profitability
Source: Own based on Buzzell and Gale, 1987.
The large market share also helps the organization to get the benefit of "oligopolistic coordination". That means that other existing organization is not able to fight with that organization that has large market share. The organization can get the power over quality of product, price and that also provide a higher rates of return than are typical in competitive markets. (Buzzell and Gale, 1988, p.336). The PIMS research also show that share is more important in stable markets than it is in unstable markets especially it is more important in high-tech industries. Software industry depends on R & D and marketing. Besides the external focus by be the PIMS database there also on inevitable internal development as well. That means that a company has to regard the development in their resources to gain the market share in the long run.
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3.3.2. The internal environment Companies that are adopting an internal environment perspective should not be built around external opportunities, but around a company's strengths (de Wit and Meyer, 1998). The following part provides a closer look at the arguments for why the internal environment is the source of sustainable competitive advantage.
Resources The criteria of firm resources to achieve sustained competitive advantage are shown in Figure 3.4.
Figure 3.4 - Firm Resource and sustained competitive advantage
Firm Resource Heterogeneity Firm Resource Immobility
Valuable Rare Imperfect Immutability Substitutability
Sustained Competitive Advantage
Source: Barney, 1991.
The first criteria for resources to be sources of sustained competitive advantage are heterogeneity and immobility. In an industry where firms posses exactly the same resources they would all be able to pursue the same competitive strategy. According to Barney (1991) it is not possible for firms to enjoy a sustained competitive advantage in such an industry. In order to have sustainable competitive advantage the resources therefore have to be heterogeneous. Heterogeneity,
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Strategic Determinants in the Software Industry
however, is obsolete if the resources easily can be transferred from one firm to another. If firm resources are perfectly mobile, then other firms can easily acquire any resources that allow some firms to implement a superior strategy. Again, it would suggest that a firm couldn't achieve sustainable competitive advantage. Therefore the two first criteria of sustainable competitive advantage are that the resources are heterogeneous and immobile. Under the assumption that resources are heterogeneous and immobile there are still four criteria that have to be fulfilled before a resource can be said to be sustainable:
• The first criterion is that the resource is valuable. The resources
can are valuable only if they are directly linked to one or more of the key success factors within an industry (Grant, 1998). Barney (1991) defines valuable resources as resources that exploit strength or neutralize threats.
• The second criterion is that the resource has to be rare. If a
resource is widely available to firms within an industry then each of these firms have the capability of exploiting that resource in the same way, thereby implementing a common strategy that gives no one firm a competitive advantage (Barney, 1991; Grant, 1998).
• That resources have to be imperfectly imitable is the third
criterion. Resources are sustainable competitive advantages if the competitors who do not possess them cannot easily obtain them. According to Barney (1991) there are three reasons why
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Strategic Determinants in the Software Industry
firm resources can be imperfectly. Firstly, unique historical conditions. Secondly, causally ambiguous. Causally ambiguity exists when the link between the resources controlled by a firm and a firm's sustained competitive advantage is not understood or understood only very imperfectly. Thirdly, socially complex. Maybe the resources are complex social phenomena that cannot be systematically managed or influenced by the firm.
• The fourth and last criterion for a resource to be imperfectly
imitable is that there are no strategically equivalent valuable resources that are themselves either not rare or imitable.
The above mentioned criteria for resources in order to be a source of sustainable competitive advantage have implicitly touched the subject of durability of resources. Sustainable refers to the fact that competitors cannot replicate the strategy. This does not mean that they "last forever" (Barney, 1991). Nevertheless, it is important to consider the durability of resources (Grant, 1998). Some resources might last longer than others. Reputation and Corporate culture are examples of long lasting resources. Other resources, like Technological patents, might be obsolete at the time it has gotten legal support.
Capabilities/Competences As mentioned above it is the combination of resources that makes them productive. The question is how the firm deploys its resources.
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Strategic Determinants in the Software Industry
Stalk et al. (1992: p. 62) argue that "in a world characterized by durable products, stable customer needs, well-defined national and regional markets, and clearly identified competitors, competition was a "war of position" in which companies occupied competitive space like squares on a chess board, building and defending market share in clearly defined product or market segments." However, this has changed and it has become more difficult and less valuable to position yourself. When product life cycles accelerate it is the ability to create new product and exploit them quickly that counts (Stalk et al., 1992). In addition to the acceleration of the product life cycles there is globalization, which breaks down barriers between national and regional markets and competitors are multiplying. In this business environment competition is a "war of movement" rather than a "war of position" (Stalk et al., 1992). The firm, therefore, has to focus less on products and markets and rather on dynamics of its own behavior. The goal is to identify and develop the hard-to-imitate organizational capabilities that distinguish a company from its competitors. According to Stalk et al. (1992: p.63) the five principles of capabilities-based competition are:
• Speed. The ability to respond to quickly to customer or market
demands and to incorporate new ideas and technologies quickly into products.
• Consistency. The ability to produce a product that unfailingly
satisfies customers' expectations.
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Strategic Determinants in the Software Industry
• Acuity. The ability to see the competitive environment clearly
and thus to anticipate and respond to customers' evolving needs and wants.
• Agility. The ability to adapt simultaneously to many different
business environments.
• Innovativeness. The ability to generate new ideas and to
combine existing elements to create new sources of value.
Summarized these five principles state that a company has to show responsiveness and innovation. This concept matches the concept of "dynamic capabilities", where "firms can show demonstrate timely responsiveness and rapid and flexible product innovation, coupled with the management capability to effectively coordinate and redeploys resources". (Teece et al., 1997, p. 515). Prahalad and
Hamel (1990) are stating the same argument when describing what "core competences" are: "The critical task is to create an organization capable of infusing products with irresistible functionality or creating products that customer need but have not yet even imagined". By stating that "the future is now" Hamel and Prahalad (1994) claim that tools of segmentation analysis, industry structure analysis, and value chain analysis are worthless in a non-existing market, i.e. the future market. Therefore, the firms should build core competences long before a precise form and structure of future markets comes completely into view (Hamel and Prahalad, 1994).
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Strategic Determinants in the Software Industry
Barlett and Goshal (1994) argue that management should move from strategy, structure, and systems to purpose, process, and people. The idea is that people are only willing to do their best for organizations with which they can identify. Each employee should be given a maximum of freedom only guided by a broad formulated purpose. One can in many ways compare this way of thinking with the basic idea of religion. "Purpose - not strategy - is the reason an organization exists" (Barlett and Goshal, 1994, p.88).
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3.4. Discussion
In the previous chapter the external and internal environment and why both are considered sources of superior performance was presented. In the following the reflections on the topic are presented.
3.4.1. Turning the inside out The Strength Weaknesses Opportunities Threat (SWOT) analysis has often been linked to the external and internal environment (Grant, 1998). Barney (1991) state that strength and weaknesses are internal related while the opportunities are related to the external environment (see Figure 3.5).
Figure 3.5 - Strength, Weaknesses, Opportunities, Threats (SWOT)
Internal Analysis
External Analysis
Strengths
Opportunities
Weaknesses
Threats
RESOURCE BASED MODEL
ENVIRONMENTAL MODEL
Source: Barney, 1991
Reading the chapter on sustainable competitive advantage one could question what is the most preferable- external orientation or internal?
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Strategic Determinants in the Software Industry
Maybe the internal environment is more suitable to argue for future opportunities and threats than the external environment. In this way you could state the role of the internal environment has turned inside out.
3.4.2. The paradox As the reader has noticed there are arguments for being both internal environment and external environment oriented when determining a strategy. Actually the internal environment and the external environment constitute the two sides of the same coin (Spanos and Lioukas, 2001). Both the external and the internal environment are influencing profitability (Spanos and Lioukas). This presentation of the different theories only reflects the point of departure. All theories are realizing that a firm has to take both environments into account, however, at different times. Porter, for instance, states that taking a closer look at a firm's value chain can only attain a competition advantage. The question is why can a firm then not focus on both at the same time?
Lets assume a company decides to focus on both the internal and the external environment. Already at the "fit through" the firm has to face the paradox of being both external and internal environment oriented. Adaptation to and of the external environment at the same time is only possible if the external environment "fits" perfectly with the internal environment. However, it is a very rare phenomenon. In most cases there will be a "misfit" between the external and the internal environment in a same time. The internal environment may not
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Strategic Determinants in the Software Industry
correspond the necessary resources and capabilities/competences of the external environment. There are two ways this could happen. Firstly, the resources and capabilities/competences are not developed enough to cover all the requirements of a particular market or industry. Secondly, the resources and capabilities/competences might exceed the requirement of a particular market or industry. In case of a "misfit" the firm most decide whether to follow the internal environment or the external environment. Is it better to find a market that fits your resources and capabilities/competences or should you develop your resources and capabilities/competences to meet the most attractive market position?
From a pessimistic point of view both path might lead to failure. If you decide to focus on a particular position in a market of constant flux there is a risk that your advantageous position has diminished by the time you have developed the necessary resources. On the other hand if you decide to focus on your internal environment there might be a risk that there is no market "fitting" your resources and capabilities/competences. However, if you decide to compromise you will be neither optimizing the use of resources nor will you be in the most attractive market position.
Some authors argue that the answer is to build strategic flexibility (Hitt et al., 1998). Strategic flexibility is the ability of a company to adjust quickly to environmental and internal changes (Hitt et al., 1998). The reason not to focus on the strategic flexibility is that it does not solve the fundamental problem of whether to be internal or external oriented. The strategic flexibility merely changes the time
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scale upon which the strategic decision is being made. But in the end even a firm with strategic flexibility has to deal with the issue of whether it should look at the external or internal environment in order to be profitable.
Finally, the connection between the external and the internal environment makes one question whether it really matters if you are focusing on one or the other? As Henderson and Mitchell (1997, p.9) state:
"...firms undertake strategic actions in response to their (external, red.) environments and, as a result of those actions, develop particular capabilities. In turn, though, the capabilities that the firms develop also shape competition".
The conclusion of this discussion is that there is no logical answer to the question of being external or internal environment oriented. There is no "right" or "wrong" in strategy. Therefore, it is interesting to see how the software companies are dealing with the paradox in practice. However, it can be assumed that the main determinants of software industry can give us opportunities of understand the which determiners are important.
3.4.3. Strategic determinants
From the descriptions of different theories, it can be said that both external and internal environment's factors influence firms' strategic choice. However, the factors
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researchers do not indicate the same determents. In the external environment Porter's industry analysis (five factors), PIMS, PEST, and market segmentations are the main sources of determinants. More specifically it can be summarized that political situation, economic stability, social cultural setting, overall technology development, customer, markets, rivalry, substitutes products, suppliers, buyers, and new entrants are the main strategic determinants, which belong to the external environments. On the other hand, core capabilities, core products, finished products, financial resources, internal technical resources, and physical resources (e.g. machine) are the main internal environmental determinants. However, these determinants can be found in a graphical presentation (3.6). The strategic determinants, which belong to the internal environment are showing in the inner circle and the strategic determinants which are belongs to the external environment are showing in the outer circle of the picture.
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3.6 Main strategic determinants Political situation New entrants Economic stability
Customer Market Core products Core competences
Finished products Suppliers Company (internal environment) Financial resources Human resources Technology Technical resources Buyers
Rivalry
Social-cultural setting
Substitutes products (external environment)
Source: Own, main strategic determinants
However, it can be assumed that every strategist has their own view and these determinates can be identified/ analyzed in their own way. The presented determinates are only based on 'theories' without considering any specific industry. The main strategic determinists in the software industry can be found in the analysis chapter.
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4.
Empirical data
This chapter contains the empirical findings gathered through six interviews with firm in the software industry. To avoid confusion among the statements the interviews will be presented separately. The presentation starts with the interviews at the three big companies and ends with the three small companies. Due to the fact that the respondents are representing their company the information will be presented as if it was the company itself.
4.1. Big companies
4.1.1. Company B1 B1's view on the software industry According to B1, the growth of the software industry is experiencing a break at the moment:
"The "big boom" in the software industry that has been going on for quite some time ended more or less with the millennium shift."
B1 explains that there are a lot of companies who are going out of business because the economy is slowing down. The key is to take market shares at the moment. It is about staying competitive by keeping up the product - but with the given resources. Today you cannot launch a big investment package on the stock market and
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thereby get a lot of money to reshape your business. The cause of that is:
"Everybody is looking for where the 'bucks' (money, red.) are going".
B1 continues by describing the software industry as a place where it is becoming hard to justify the "best of breed" solutions:
"In the software industry there is a tendency from 'best of breed' to the big players".
B1 presents two perspectives that explain this. Firstly, the big players are catching up. Secondly, the "best of breed" solution must be very much more efficient than a solution that belongs to normal software package because integration is very expensive.
To stay competitive in the software industry one has to make the right decisions and the right moves all the time. Making one fundamental wrong move and one might be out of the business. Firms like SSA prove this. From being market leaders in the business application field fifteen years ago, they are almost gone from the market today.
B1's strategic focus
"The market is of course something that you most regard when you form a strategy. And what we have had are putting into perspective where we can 'beat' the competition the easiest way or where we are strong ".
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Company B1 positions itself by looking at its current product portfolio, then at the current market and where it has a strong position. Finally B1 examines whether it can sell more in that area. Because of limited resources the firm would not focus on things where it does not have a market position anyway.
There are several aspects that B1 takes into account before positioning itself. The first thing is to look at the core product that B1 is selling and find out whether it supports the processes required by the particular market segment. The following quota explains the underlying reason for this:
"Basically, it is all one core product, it is the same product, but you set it up differently. Niche it to the market".
The respondent explains the underlying historical development as follows:
"In the beginning you sold independent systems, like financial systems, customerorder system, pay role system. After that the new things was to integrate everything into one package. With this package you could go to the market and say that you have one package from one supplier. That meant that the customer did not have to build bridges between their systems. Such a package could sell to all companies because they came from a very disaggregated world. What followed was that the software companies had to be more specific, the general package was not good enough".
Therefore, B1 started to develop industry specific applications, which is a two-way strategy. Firstly, you streamline the sales organization to talk market specific terminology and to learn about the requirements
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and the regulations and the processes in the chosen industry. Secondly, the software product has to support the processes.
To find the requirements for a software application and to keep the application up to date B1 analyses competitors and customers. According to B1 you have to look at competitors, what are the competitors doing, where are they anywhere from hurting us. However, this is mainly done by asking new customers or former customers why the changed system. B1 is building relationships to customers to learn from their needs.
"Building customer relationships is therefore important, but not at any price".
B1 argue that one has to be very specific when choosing companies to do partnerships with. It has to be a company that is leading in its industry or a company that is on the leading edge of what is possible in technology. If it is a company that just follows the crowd then they will adopt the technology once it has passed its peak. B1 works only with companies that want to change their business and take advantage of new technology and solutions rather than just follow the other ones. There is usually a sort of partnership involved. The partnership includes that both companies would like to coexist.
B1 is a global player and therefore has to consider the geographical aspect as well. The different laws and regulations might affect the strategic decision. A part from the geographical aspect there is the technical aspect. B1 argues that even if one has a working application
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it is crucial to keep up with technical development on which the application is executed.
"We have been in the business for close to 20 years and of course the hardware development underneath the implementation has changed dramatically".
According to B1, even the best software application will be a failure if it is not complying technical standards.
B1's competitive advantage
"In the niche markets we have functionality that is better than others. In that area it is the product, in other it is the service".
Furthermore, B1 is a 'one stop shop', meaning that they do software, but they also have and implementation organization. They do not implement their software through third parties. This makes the implementation specialists, consultants, in the B1 network much closer to the core company, and that result in higher quality in the installation.
4.1.2. Company B2 B2's view on the software industry During the economy of the late 1990's B2 had a growth strategy. It was easy to get money from the financial people in order to grow. The financial support was based on a belief in later earnings. This has changed now. The software companies, including B2, are more
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interested to make profit right now. Everyone is focusing very much on that. B2 is looking at where the company has possibility to make money.
"I think, we are somewhere in the middle of nowhere, nothing dramatic is happening on the market or in the technology".
B2 believes that after the change to year 2000 nothing dramatic has happened in the technological aspect of the software industry.
"People are more important now then the couple of years ago."
According to B2 it is a more stable situation then it was a couple of years ago. However, there is always a fight on the market, but the fight is not so much about who has the best software package. It is very much about the consulting organization, the people implementing the systems. That is how you get new business on the market.
B2's strategic focus
"If you look on the market everyone is probably searching some special niche where they can be stronger than the other one".
B2 are looking at what market should penetrate and where it might have a strong position with its product. At present B2 is planning to focus on seven different segments and skip all the other ones. The seven segments were chosen according to the amount of experience in those segments and because B2 believes that those kinds of segments will invest in software.
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A couple of years ago B2 took a decision to have more directly selling from existing customers. B2 mentions two reasons for that decision. Firstly, to understand what the customer really wants in order to develop the software even more, and secondly, the people inside B2 should learn more about the customers business so they can identify new business opportunities.
The macro environment is taken into account when deciding where to grow. Especially when deciding which country to focus on. Examination of BMP and economic growth is important issues.
In the Swedish part of B2 they forecast 12 month in advanced. For the company growth and where they are looking 2-3 years a head.
B2's competitive advantage B2 believes that component based software is the reason for their fast growing. The component based software product makes it easy for B2 to add new components to the existing product (software). Furthermore, B2 is able to set up small independent groups to try out new business opportunities.
"Try in the small group and then, like rings in the water, spread their experience throughout the company".
It is a basic idea of B2 organization to have small independent groups that can go in different directions.
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4.1.3. Company B3 B3's view on the software industry
"I have been in the software industry for 15 years. It is always a not developed market. It is not like selling cars. That is a developed market. You can look into the future and have a fairly good idea what will happen. Software industry is not like that. It is still a very complex business - you don't really now what is happening".
According to B3 the software industry is changing all the time. It is changing faster than the market can adapt to the changes. The respondent is explaining that during the past fifteen years people have always said: "in five years from now the industry will be none complex and more static", but that has never happened. B3 does not think that the market will become a static solution.
In B3's arena of the industry there is a large amount of competition. And there has always been. However, B3 is focusing on large accounts with large data volumes. There are fewer competitors dealing with large accounts and large data volumes. But the competitors are only big software companies. B3 explains it as follows:
"The big companies in Sweden only want to do business with big software companies".
The other big companies (customers) do not want to buy from a small software company because they do not know whether the little software company will be on the market next year.
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B3's strategic focus
"A key thing is that we tried to divide the market into different segments. When we do that we always look for our decision. We are trying to make sure that it is not overcrowded with competitors. See that we have unique selling points within that arena. And then go for that area and not try to run after deals in all the other areas".
B3 points out that it is important to focus on specific segments because their software can be applied for many segments. When B3 has made a strategic decision about working in specific areas they focus on these only. That is very important, because otherwise B3 would spread their resources around on many areas.
B3 product development is purely customer driven. B3 customers can send in requests about changes in the software. B3 will then consider the requests for a new release of their product. If B3 goes into new areas it is always customer driven. Some customers tell them to enter a new area and maybe B3 will do something jointly together with them. If several customers come up with the same idea B3 might do a product out of it.
B3 is heavily involved in cooperation with other firms. This is mainly due to the fact that B3 has a very small consulting department. B3 is trying to make the software together with large consulting companies. B3 has partner relations with all the big consulting firms. B3 spends quite a lot of time on their partner relations.
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The macro environment is not influencing B3 business. Furthermore, B3 find it to be an excuse for not succeeding. B3 is looking more on the micro level, meaning the specific businesses.
B3's competitive advantage B3 competitive advantage lies in having unique products and unique market position backed up by good competence. The respondent points out that the strong market position is very nice in these rough times. The advantage of market position in the software business is in being attractive for the large Swedish organizations. One has to have a fairly good market position to be attractive. According to B3 it is expensive to go with a vendor the first time. Therefore, they will staywith their vendors or choose a vendor that has a good market position.
4.2. Small companies
4.2.1. Company S1 S1's view on the software industry
"Earlier you made a program you compiled it and it could work for 10 years! The environment did not change. Today the environment is changing all the time".
According to S1 the technology is changing very fast. The pressure on programmers is increasing. They have to know much more today they have to know the whole environment and the environment is changing all the time. A software company has to follow the
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technological development all the time. A company like S1 looks at how new technology fits to its solutions. In case of a match they will adopt it. Otherwise, the company would sit back with old software.
With today's object-oriented components in the software industry it has become relatively cheap and fast to build software. It was not like that before. That is because a company can reuse the software components. Today's programmers are not developing software they are building software. It is like the toy LEGO; the programmer just has to put the pieces together. S1 is developing complete software and solving relatively complex solutions with only two programmers. To do what they are doing today you needed 20 employees before. Today the companies have to focus on understanding the business and understanding the problem, as the respondent expresses it:
"Software in itself is nothing. It is the service and the knowledge of customers that makes it important".
It is not only the technology that is changing. S1 think that the customers have changed too. The customers know what they can expect from a software package. The customers are not very surprised that your software package can write, print, format etc.
"It feels like we have come to a situation where the software industry has become like electricity or something. Everyone takes it for granted. If you sell an ERP package you don't have to describe the components inside the system. Everyone knows what you can expect from that kind of software. Go back 10 years, there you had to describe what the software was doing".
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The danger of dealing with experienced customers is that the often have an opinion about a certain product. According to S1 the customers do not act neutral. In this case S1 believes that selling a software product it is more about emotions than it is about having the best product. Because people are having an opinion on software it is much more religious or political today.
S1's strategic focus S1 strategic focus is always based on what the core of the product looks like. When S1 has a core solution, in this case software and the knowledge about the software, they look for a market that fits the core solution. In other words, they are not finding the market and then fitting the product to the market. S1 explains this procedure as follows:
"If you go for lucrative markets it would be an extremely surprise if there was not someone there already. Secondly, you might go into the trap of never ending development. It is so easy to find a market where there is big money and you develop and you develop. But you can't do that today because it is too expensive and too risky".
However, with this S1 does not mean that the company is not flexible. It is flexible but within the limits of the architecture of their solutions. According to B3 a company needs to have a good architecture that is flexible from the beginning. According to company S1 there are two ways of developing the basic components. The first one is to work closely with universities:
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"You work with guys who are the top guys there (university, red.). They know everything about the trends the latest developments, the most interesting ideas. Based on that you can say there most be a need. So you make your solution. Then you have made your first component and then you go out and look for a market that fits. It is science driven. If you have the luxury of having those kind of contacts".
Another way is to start from a need. The company has to discover a very specific need. As a company you go for that need make a solution and then look if anybody else has made it.
S1's competitive advantage B3 state that their competitive advantage lies in the fact that they pick their market, which means that they also pick competitors.
4.2.2. Company S2 S2's view on the software industry From a technology point of view the software industry is changing/evolving all the time. This evolution forces the actors of the software industry to change. S2 also thinks that it is changing from a customer's point of view. The customers are more and more aware of the opportunities in software.
"The bubble effect has cost a lot of money. It is becoming more and more like a traditional industry it is the delivery that counts".
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S2 have to deliver something and prove that it is working. Building a software system has become more like building a house. However, the difference between building a house and building a software system is that you can reuse the previous buildings for new buildings. Therefore the systems S2 are building are quite rapidly built.
S2's strategic focus S2 has done two different strategic approaches. In the beginning S2 anticipated a market need for a certain technology. The technology would enable S2 to gain relative advantage over competitors. Therefore S2 introduced a strategy based on the anticipated market need of the technology. This strategy was fulfilled in 1999 where S2 launched the first software product for developing the technology. The problem was that the market did not respond:
"There was a lot of interest. A lot of hits on our website and a lot of attention - but not too much money".
Now S2 has turned its strategy toward its customers. S2 saw that it had 90% of its income from strategically not focused customers. S2 realized that they possessed something that is of valuable to their customers. S2 therefore decided to dig into the company and look at what it was capable of doing. The outcome was a new product family, which was oriented towards this market.
When developing the new product family S2 decided to speak and listen to the customers.
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During this listening S2 had their competence, experience in mind. They did this to avoid developing a strategy, which they could not fulfill.
S2 know that their product can be applied to other markets. The problem is that it takes long time to know a new market.
"Since we are few employees. Learning a new branch takes long time. It takes a lot of time".
According to S2 partners might them out of that problem. S2 build relationships with customers who need S2 technology and in return S2 can learn about the customers' market.
S2's competitive advantage S2's competitive advantage is based on knowledge and technology. If other firms should try to take S2's market it would last them at least 1- 2 years to reach the level of knowledge and experience that S2 has now.
4.2.3. Company S3 S3's view on the software industry In general S3 perceives the software industry as very dynamic. A company can be 100 % certain that if someone comes up with a great solution, 100 other companies will come and try to make the same solution.
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S3's strategic focus
"When you are a small company the only way you can say that you are best in something is by doing it consistently".
S3 is very focused on one niche in the software industry. With 6 employees S3 would have difficulties convincing customers that they are the best on the market in many things. S3 believes that focusing is the only way to be competitive and being a head of all the others.
"We are on track, we don't go around doing lots of other stuff".
In other words, positioning on the market is a very important strategy for S3.
In the beginning S3 was looking at what the players on the market was doing. After an analysis of the competitors products S3 knew the strength and weaknesses of the competitor's products. Upon the analysis S3 started to develop a product that contained the positive things found in the analysis and improved the negative things found in the analysis. This strategy was very dependent on the abilities and resources of S3 and what S3 could produce. The focus was on what S3 can do and how can they could do it better. This it is very important because it enables one to produce something and come on the market. However, at the same time one has to be aware of the market needs.
Now that S3 is on the open market they still look at what the competition is doing but are also listening to the customers. The customers know a lot and use the system every day. It is from the
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customers that S3 gets its inspiration for new releases. Furthermore, it keeps clients happy and attracts new clients. However, one should look at what how important the customer is and whether S3 is able to fulfill the wishes of the customer. S3 ground role is to stick with its business area and to the business plan. S3 believes that if one follows the customers too much, then there is a risk that one starts spreading. A small company like S3 cannot afford that.
S3's competitive advantage
"We are very good at listening to our clients. We are a small company and very flexible, which means that we can develop something very fast".
S3's clients see that S3 listened to them from one version to the next version. Further S3 state that their program allows the user to do more than the competitors, they have more functions, it is cheaper, they give you the best support, and it is very flexible. S3 can much easier update and create new functions. S3 listens more to the customer. Many large competitors do not really care because they are big. For S3 even small customers are very important. Therefore, S3 believes to have a better customer care.
At the same time S3 educates their employees by letting them attain courses. S3 think that it is important to have the skilled resources in the company in order to be prepared for customer demands.
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5.
Analysis
This chapter will have a closer look to the strategic determinants in the software industry. In the first part of this chapter the strategic determinants of big and small companies will be analyzed separately considering the internal and external environment, followed by a short discussion which presents on an overview of the main strategic determinists of software industry with compression between big and small companies. The next section will have an attempt to find out the reason behind the existence of these factors in software industry. The last part presents firms' strategic focus considering the treatment of the main strategic determinants to be competitive in software industry. Furthermore, all discussion in this chapter is based on the conducted empirical material with the help of theories (which can be found in the previous chapters)
What are the main strategic external and internal determinants in the software industry?
5.1. The strategic determinants regarding external environment
The conducted interviews with the six personals from six different software companies indicate that there are some fundamental strategic determinants, which belongs to the external environment. Because of the differences of resources of big and small companies, the
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discussion is going to present the strategic determinates of external environments separately.
Big companies Many researchers (e.g. Johnson and Scholes, 1999) found that the external environment has a big influence on firms. Furthermore, they argued that firms should consider the external forces and adapt the changing situations (more information can be found in the frame of reference). On the other hand, Hill and Jones (1989) put emphasis on macro environment especially political, economic, social and technology (PEST). However, this empirical findings shows that effects of macro environment in big software companies are existed and complex too, especially the effects of economy is a considering factors. The economic slowdown (macro environment) makes the situation more complicated finding new business opportunities.
However, One interviewee (B3) claims that there is no influences of macro environment on their firm but in some point of view the result shows that this firms (B3) also consider the external environment. However, two other interviewees (B1 & B2) think that there are some clear influences of the external environment on their firms, which are necessary to consider in the strategic point of view. However all the interviews (B1, B2& B3) clams that they are more focusing on present businesses. They also state that they give more concentration to the existing customers, markets as well as the present business than potentials segments. They (B1, B2 & B3) often use consulting firms to find out the potential markets and gather information regarding
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existing markets. That means that they are highly market oriented and focusing on changing external environment. One interviewee (B3) argues that they always keep a chain of relation with their customers. Moreover that interviewee (B3) claims that they are not selling products, they are providing the service incessantly to the customers. That means the existing market is a vital factor for such companies and they are highly customers oriented.
On the other hand the big software companies think that the technology is also changing rapidly but changing of core techniques is much more stable than before (90s). However, developments of hardware, especially storage capacity and the speed have a conclusive connection with the firms' innovation and development of software. That means that software industry is very much technology oriented and the big companies are forced to use the most available technology. The changing time and customer's preferences also drive the strategic choices. That means that research and development activities play the key role in software industry.
Moreover, those interviewees claim that the exchange of idea and knowledge with existing customers is vital for big software companies and that also helps them improving products. The big software companies believe that customers are now more trained than ever as well as they have good knowledge of their products. Moreover these interviewees (B1, B2 & B3) believe that it should get a priority to consider specific needs. Furthermore they think that 'customer orientation' helps them to find new business opportunities. That
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means that these companies are considering the overall changing of external environment intimately as well as their market/customers.
Grant (1998), Porter (1985), Porter (1984) emphasize the need to find the profitability from the market segments. Those strategists also claimed that effective strategy is often market oriented and segmentation is the vital component why to concentrate on specific market(s). The present study found that these big companies (B1, B2 & B3) are involved in more than one type of business and they are using the market segmentation. Furthermore, all included big software firms (B1, B2 & B3) are operating internationally and each subsidiary gives their concentration to the local market. Furthermore they are more interested to stay competitive in existing markets by keeping up the present products/business. However all finished products are derived form core products(s). They also claim that the social system is an important factor for selling software. There are some software products that can be used in different markets even in different geographical markets. But that does not mean that there are any alternatives not to be specific in market concentration.
On the other hand, Porter (1985) emphasized industry analysis and claimed that there are five factors existent in all types of industry, some of the factors are very important in some specific industry (more details can be found in the part of theoretical framework). Present study found that rivalry in software industry is very high. Rivals are always keen developing to their products and they always look to the competitions-what are the others doing? In most cases rivalry belongs to technology development. That means that all the software
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companies are developing their products in a very competitive environment. Moreover, the study found that big players have little completion with the small firms; the rivals of a big company are other big companies. However the big companies are bewaring to keep the relation with the other big players in different industries. One interviewee (B3) claims that the Swedish big companies are more interested to do business with other big software companies; the main reason is that there have no guarantee of existence of the a small farm in future years. That means that the reliability/goodwill of a company plays a key roll in software business. Furthermore, long-term partnership between big companies in different companies/industries is often found, that also secures the firm's markets stability, technology advantages moreover competitive advantages.
Small companies There are thee small companies that are included in this study. However, the small companies likely concentrate in only one business (market) and rare more than two.
Many strategists like Hill and Jones (1989) emphasized that the effects of macro environment are very important for all types of business. This study also shows the importance of macro environment considering small software companies. They all (S1, S2 & S3) agree that the environment of software industry is changing rapidly and they are giving their concentration on specific business. That means that each of these businesses has its own characteristics and there is no alternative way to adopt rapid changing external factors (e.g.
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technology, economy, market, customer etc.). One of the personal argues (S1) that they have limited resources and rivals may also have the same resource, so they need to provide some additional facilities/services to attract customs. Furthermore, that interviewee (S1) also believes that now the environment is changing much faster than in the past. So they (S1) should concentrate on specific markets and find more improved and problem solving products. That means that small companies in software industries have limited resources and they need to develop their products for rapid changing target markets.
However, the small companies think that the concentration on customer's need is vital. According to that interviewee (S1), the idea about future product/improvement often comes from existing customers and facilities (idea) can be added to next versions of the products. So, the product development activities are maintaining endlessly. Moreover, all the development procedures are technology driven as well as target market oriented. Another personal (S2) thinks that customers are now well informed about the opportunities of specific software, they (customers) know what they are buying. That means that the small companies are highly customer oriented and they are beware to fulfill of customers' needs.
Moreover, the small firms think that customers are free to choose products from different software firms. That means that the rivalry in software industry is very high considering small companies. Porters (1985) five factors and industry analysis is applicable in software industry. One interviewee (S1) claimed that if one rival introduces one additional facility in a specific type of products than that
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facility/component becomes an ultimate part for similar kinds of products.
5.2. The determinants regarding internal environment
However the study found that there are some strategic determinants, which belong to the internal environment. The discussion of strategic determinants regarding the internal environment will be conducted separately for big and small companies.
Big companies Many modern time writers (e.g. Grant, 1998, Parhalad and Hamel, 1990) have argued that internal resource building is the key matter for competitiveness. Moreover this thought sets value on building core competences/capabilities as well as giving concentration on core products. This study found that big companies are involved in different software businesses but all finished products derive from the core product(s). Furthermore, development of those finished product(s) are highly dependent on the development of 'core products'. They (B1, B2, B3) think that if they rely on core product development that will also show the subsequently products. One of the interviewee (B1) asserts that they are successful because they have unique products as well as an unique market and more important internal resources. That means that internal resources,
competence/capabilities are the major factors for choosing any business.
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Many strategists like Grant (1998) attached importance to resource building as a prerequisite for firms' competitiveness. Present study found that the resource-based theory in business strategy is also very important for software industry. However, the skilled human resource is an advantage for software companies especially for big players. The development of software is very much technology driven and market oriented. However only an expert can realize the needs of the market/customers and is able to provide/develop products and/or technology to fulfill specific market demands over the changing time.
An interviewee (B1) argues that they are competitive because of quality products, however others are acting on the market by providing additional services to the customers. That means that company (B1) has realized that they do not need to provide additional service to the customers as a market leader. Moreover, this company (B1) provides some other types of facilities like "the one stop shop" to the customers. To serve the customers' demand is not only necessary to provide better products but also better customers support.
Stalk et al (1992) have argued that five principals (Speed, Consistency, Acuity, Agility and Innovation) are vital for competitive advantage. This study found that speed and consistency are the most important variables for software industry. The component-based software is very helpful for software companies because that also allows them to develop specific parts separately. That also allows them to keep developing activities endlessly and they also can provide a latest version of finished product within 'a very short time'.
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Integration of software in single packages is complex but the component-based software helps to remove such obstacles. Moreover, the study found that they are using the most developed technology to attend the demand of different customers' needs. That means that development of technology can drive further products.
Small companies However, present study found that introduction of new products is also an essential part for small companies. Stalk et al (1992) states that there is no alternative beside innovation. The small companies (S1) think that today's programmers are not developing software, but they are actually building software. That means that research and development is also an important matter for small software companies and that they are highly dependent to building the core competence. That means that customers' specific needs are the main factor for these companies. The study also shows that the development of core product(s) is very important for all these small companies as well. They claim (S1) that if they develop the core products that also ensures them to offer more 'facilities' to the customers. That means that these companies give more concentration on development of core product(s).
Furthermore, they (S1) claim that they cannot only rely on the market but also have to regard the internal resources. There are some big earning businesses but that means that they will need to invest more and take more risk, and they might not be able to enter in such business because of limited resources. Another personal (S2) claims
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that building software is like building a house but software can be reused and develop. That means that building skills and knowledge are vital in software industry and that can be achieved in a long run. Building core competences/capabilities is very important for all companies. (Hamel and Prahalad, 1994). These companies (S2) are more interested to develop the core product because they think that also helps them to build a 'new product family'. On the other hand, another personal (S1) claims that there are no alternatives of flexibility for small software companies. That also reminds us that the market does not only drive small companies but it is also very important to consider the opportunities and abilities (resources). According to that interviewee (S1) no company ignores the importance of markets. That means that finding a connection between these two aspects (i.d. specific market and available resources) is necessary for small firms.
However, Slater and Naver (1999) claimed that the market orientation does not only focus on the market, but also means to understand all circumstances. One interviewee (S1) claims that on the one hand the product can serve an existing market demand, and on the other hand provide new innovations that are not explicitly demanded but very helpful. That means that the internal resource is vital matter for gaining the ability to create and/or provide such demand. Another interviewee (S3) claims that they are flexible and they have the skill to provide better and fast service and their product are designed to fulfill the specific market demand. That means that they have strength of core product (s) and capabilities. Furthermore, they (S3) emphasized the necessity of skilled human resources.
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5.3. Comparison strategic determinants according small and big companies
Evaluating strategic determinants in software industry this study has not show any significant differences between big and small firms. However, the big companies are more focusing on external environment then the small companies and the small companies are focusing on resources. The small firms have limited resources and they are involved in particular (one or two) business and they are focusing more on resource-based strategy. However, the big firms are mainly involved in different businesses but all the segments are supported by the core product(s). Those big firms have well-heeled resources and they have the ability to find new business opportunities any time. Both small and big companies are highly customer/market oriented as well as technology driven and the rivalry is very high. Moreover, all types of business (or business segmentation) have their own rivals and customers/market and all business are highly depended on technological development. The change in external environment especially the regression of economy has a negative influence in software industry.
On the other hand, the study also found that both big and small firms are highly relying on their resources. All of the researched companies are emphasizing the development of core competences and core product(s). The big players gain advantage through resources (e.g. human, technology) that also help them to keep market position in the existing business but they are very careful about new businesses. However, each business has its own unique characteristics and each
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company has chosen target market (s) considering its capabilities. Both small and big firms are always considering the market opportunities but they are more interested to give concentration on existent businesses. Moreover there are direct relation with core and finish products.
5.1 Main Strategic determinants
Market/Customer
Economy
Core products
Core competences
Company
(internal environment)
Human resources
Technical resources
Rivalry
(external environment)
Technology
Source: Own, main strategic determinants in software industry
In the literature, writers like Grant (1998) considered both the internal and external environment for the development of firms. This study found that all the researched companies are very much influenced by both external and internal forces (main strategic determinates are shown in figure 5.1). Barney (1991) argues that a firm that is able to understand the strength and weakness by internal analysis and the
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opportunities and threats can be found by external analysis of the environment (more information can be fond in the theoretical framework). However all big and small companies are highly market driven and dependent on technology development as well as on human resources. There is a direct relation between core products and finished products. All types of business segments have their own rivals as well as characteristics but all development process is based on core product(s).
Why are they the main strategic external and internal determinants and how they are related?
5.4. The Relation between different internal and external environmental factors
The study also found that there is a direct connection between different identified strategic determinants. However, these factors could be presented individually but they are adjoined closely with each other regardless firms' focus on external or internal environment.
The technology is the key factors for software industry; technology can be developed inside the firm or can be added from outside (e.g. partners). All the researched companies are focusing on target markets. That also means that they are concentrating on specific customers and are aware to fulfill the customers' needs. That means that customers and market are not separate issues in the 'firms' focus' point of view. However firms' resources are the key factor to provide better products as well as services to the customers to enhance the
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target market; these can help to provide the product which can create/fulfill specific demand of the customer. The finished products are developed for specific market(s), however all development activities are focusing on core products. For developing the core product, resource buildings (capabilities) as well as partnership building with other companies/industry are key issues. The ultimate outcome is the competitive advantage of the firm. In the fast changing external environment firms need to allow feedback from the customers and give their concentration on innovation and
development. That also helps to get advantages over rivals. The innovation of a firm can contribute to the overall technology development (function of main strategic determinates are shown in figure 5.2.).
5.2 Interlinks between different strategic determents
Technology Development
Customers orientation and core market analysis Developing activities Product for specific market demand Customers' feedback Services
Information sharing/partnership building
Competitive advantage
Source: Own, function of main strategic determinants 88
Strategic Determinants in the Software Industry
However, all the activities are causally determined by each other and the combination of all activities is a prerequisite for competitive advantage of a firm, all activities are active simultaneously.
What should firms focus on to handle the main strategic determinants to be competitive in software industry?
5.5. Firm's focus in order to handle the main strategic determinants in the software industry
The findings show that the main strategic determinants in the software industry are closely interrelated. This is an approach to present some key activities, which are essential to handle the main strategic determinants.
Product innovation/development The finished products can be marketed in different labels and each label should have the ability to solve particular problems. However, the core product(s) should be out of one particular category that focuses on the company's core capabilities. Therefore a high level of integration of different technological developments is necessary and the product should be able to fulfill the specific customers/market demand. Those for software companies invent or develop new kinds of products. Furthermore, the product should have following attributes-
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Strategic Determinants in the Software Industry
The software should be user-friendly The software should ensure more advanced facilities Software should be able to contain more data Attract more users
Relation building with customers Providing necessary support to the existing customers is vital for Software companies. However, the customers require a consistent, high value stream of advisory, audit, & strategic services to ensure customers' satisfaction. Software companies can provide some exceptional services to the customers through 'commitment to customer satisfaction' that also can create the specific software's demand in a new market.
Resource development (technology) The resource of software companies can be used in different ways and they can share the development of technology with each other. That can also create a demand for new types of product. Technological development can be deployed in different types of businesses and software firm can go close to customers by using more developed technology.
Resource development (human) Although software industry is very much technology oriented, human resource skills can make the difference within two firms, which have the same technology. A software firms should remain developing activities on human resources. Furthermore work with university,
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partner firms, and internal education can be a central issue to be competitive in software industry.
5.3 Firms focus on to handle the main strategic determinants
Development/Innovation
Relation building
Resource development (technology)
Competitive advantage (Company)
Resource development (human)
Partnership building
Capabilities building
Source: Own, firms' focus
Capabilities/ competences building Software industry is very competitive and firms need to develop their capabilities as well as tangible-intangible resources. Furthermore, they need to understand their overall position and to analyze their financial, human and physical resources for subsequently development.
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Establishment of partnerships with related parties Working with partner companies is also essential for all technologyoriented companies especially in the 'technology transfer' point of view. Technology development can be achieved within or outside the firm; building partnerships with other companies/industries could be a optimum approach for acquiring the most developed technology. Moreover, technological development in one industry/company can be used in another industry/company. That also helps to create/increase demand as well as to cut the costs. Therefore, the cross industry technological development can be a crucial issue to be competitive in software industry.
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6.
Conclusion
This chapter will present a summary of this thesis. Besides, this presentation considers the problem statements of "the strategic determent in the software industry" as well.
The term of software industry is gigantic and complex. There are numbers of businesses and different determinants, which are important in each of the business. When we look on the theories, there are several strategic determinants that can be identified in general. The external or internal environment has some influences firms' strategic choice. The main theme of these two dimensions is that a firm can adapt the external environment to act in conformity within the whole environment. Secondly a firm can focus on the internal environment (e.g. resource, capabilities) to be competitive. These two concepts are known as 'inside out' 'outside in' approaches in the firms focus point of view.
However, the study found that there are no significant differences between big and small software companies on the firms' focus point of view. Big and small companies are involved in different businesses. One of the most important finding that the main strategic determinants are belong so both external and internal environment that also shows that the researched companies are considering both the 'inside-out' and 'outside-in' approach.
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6.1. Strategic determinants in the software industry
This study has fund a number of strategic determinants, which are active in software industry including external and internal environment. These are:
External determinates
•Market/customer •Technology •Economy •Rivalry
Internal determinates
•Core competences •Core products •Technical resources •Human resources
6.2. The relation between external and internal environment factors
The present study shows that the main identified strategic determinants in software industry are maintaining the linkage between each other but at the same time each of these factors has to be analyzed separately. Innovation/development is very important in software industry. Technology plays the key factor to serve the market demand. Companies need to develop core capabilities to be more
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efficient. On the other hand, human resources are very important for the integration of technology, and tangible and intangible resources. Moreover, all the functions of a firm should be centered on target market(s) as well as specific customers. Therefore, product development means developing the core products considering feedback from customers. That's why all of the researched companies are focusing on present market and they are more customer oriented and technology driven.
6.3. Strategic focus
However, the study found that building capabilities/competence of a company is more important than considering the future opportunities and/or changing external environment. All of the researched companies focused on specific markets/customers. The specific customer's need is very essential for software industry. The human resource and technology development is necessary to handle the market's demand. All the development activities should focus on core products. That could be a magic combination for competitive advantage in software industry. Moreover, a software company is highly dependent on technology development; the technology can be achieved by own innovation or acquired from outside sources. Therefore, building partnership with different industry/companies in increasingly is very necessary. However, each company should develop the strategy considering their own capabilities.
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6.4. Personal reflection on writing thesis paper
Working with a master thesis project and taking an academic course is not the same thing. A master thesis project helps the student to develop and to follow his/her own individual ideas and thoughts under superior guidance. Besides the well-established research theories and practical data, personal reflection leads to an ultimate result. However, writing a master thesis is more a learning process than taking any course-based study. It also gives students an opportunity to work in a deeper field of study in their interesting field.
"The strategic determinants in the software industry" as research topic was chosen, but when conducting the study it has to be considered that software industry is very big and complex. The included software firms are involved in several types of software businesses. Each type of business has its own unique characteristics and the market is also different. However more or less all type of software business is closely related and the development of technology can affect all type of business as well. This diversification of business might make thiswork more difficult.
In a final word it can be said that software industry has a good prospect in the near future and the industry is still growing rapidly even in a situation when the global economy is slowing down. The uninterrupted development of Internet technology and memory storage capacity can facilitate the future prospect for software industry.
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7.
References
Thesis writing
This thesis project has been started in the middle of Oct 2002 as a group work of two international master students (Bjørn-Henrik Zink & Sadat-ur Rahman). After working more than eight weeks we made the decision to complete the thesis paper separately. That means that each student has it's individual version of thesis paper. However, the Introduction, Methodology, Frame of reference and the Empirical data are containing more or less same data/text (except some little changes). Last sections in this thesis (analysis and conclusion) have been written completely independent.
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IFS, December 11, 2002. Intentia, December 4, 2002. Optimal Solutions, December 18, 2002. Nescit, December 10, 2002. SAS Institute, December 16, 2002. Secret Labs, December 16, 2002.
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Interview Guide
Company Information:
Appendix A
• •
Firm size o Employees o Turn Over Firm position o What are you producing? o Who are your main customers? o Who are your main competitors? o What is your relative position?
Industry/Market Information:
• • •
Describe how you perceive the software industry? Describe how you perceive competition in the software industry?
Orientation: What determines your strategy? o Resources? o Capabilities/Competences o Customer? o Competitors? o Industry? o Macro Environment?
•
Why are you (not) focusing on: o Resources? o Capabilities/Competences? o Customer? o Competitors? o Industry? o Macro Environment?
What do you consider being the most important factor(s) for success in the software industry? 104
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