Study of Software Industry Using Porter's Five Forces Model

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Abstract

Corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should be based on an understanding of industry structures, and the way they change.

Michael Porter provided a frame work that models an industry as being influenced by five forces. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porter’s model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry. A strategic Business manager seeking to develop an edge over rivals can use this model to understand the industry context in which the firm operates.

Software industry is a growing industry and there are many potential new entrants to the industry. A study of the Software industry using Porter’s five forces model provides key insights into the industry trends. The study provides key challenges faced by the industry, and throws up some great opportunities that are present in the industry.

Overall, the studies done through this paper reveal that software industry is a great industry to get into, for those who have the capability to create opportunities out of challenges.

Introduction

Software Industry is considered to be a very profitable industry. This perception attracts many players to this field. Many of the new entrants to the industry do not do any scientific analysis before they get into the field. This some times result into failures and uncertainties in the industry. A lot of new entrants fail to correctly assess and analyse the competitive strength and position of the firm in this industry.

Michael Porter’s (1980) famous Five Forces of Competitive Position model provides a very effective way of doing this assessment for any industry, and can be used in the software industry too. This paper does a detailed study of the software industry using Porter’s model and the findings will help new entrepreneurs and existing ones to arrive at the right strategies for being unique and addressing the competition.

This paper attempts to analyse the software industry based on Porter’s five forces model.

Literature Review

Porter's Five Forces
No organization is an island unto itself. Its ability to thrive is affected by many factors, including its competition. Michael Porter (1980), of the Harvard Business School, has developed the five forces model to describe and analyze these factors. Apart from Porters Book Competitive Strategy: Techniques for Analyzing Industries and Competitors“ in 1980, there are very many internet resources and articles which provide insight into the model. Some of them are www.themanager.org , www.businessballs.com, www.quickmba.com etc

In this model, there are five competitive forces that interactively shape the dynamic environment of any industry.

Rivalry Among Existing Firms
All companies strive to improve their position with respect to their rivals. Companies use a variety of tactics to secure advantage; for example, product innovation and differentiation, patents, pricing, distribution systems, and advertising. In many industries, the use of one or more of these tactics by one company provokes a response by its competitors. Over time, this action-reaction dilemma can damage both the companies and the industry at large. This happened in the semiconductor industry: when one company began to build up production capacity for RAM (random-access memory) chips, the others followed suit, and the resultant overcapacity gave buyers an inordinate amount of leverage, precipitating a crash in prices.

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