Competitive Advantage in the Software Industry M. St.Quintin ABSTRACT
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Transactions on Information and Communications Technologies vol 4, © 1993 WIT Press, www.witpress.com, ISSN 1743-3517 Competitive advantage in the software industry M. St.Quintin ABSTRACT The software industry is defined to include all software development activities, regardless of whether the development is done as the firm's primary business activity, as part of the development of software embedded in the firm's prod- ucts, or to meet internal information processing needs. Porter's 1 Diamond Model is used to identify the determinants of national ad- vantage for the software industry, including the role of government as a support- ing or detracting factor. In the case of the computer industry, it is shown how Japan's Ministry for International Trade and Industry used developmental strategies to establish a national competitive advantage. However, caution should be exercised in attempting to apply this model in all situations. Direct government intervention and state ownership aimed at achieving short term na- tional objectives are viewed as an impediment to competitiveness. Canadian ex- amples of state ownership in the aircraft and cellular telephone industries re- sulted in the loss of millions of tax-payers' dollars without establishing long term stability. The use of developmental strategies by countries in Pacific Asia to gain com- petitive advantage in the software industry is also evaluated. While credible, it is concluded that these initiatives do not pose an immediate threat to current leaders in the industry. Finally, Canada's software industry is described along with industry and government actions to improve quality and competitiveness. Areas for concern include shortages in management expertise, and only fragile strengths in areas such as research and development or export orientation. Several recent devel- opments initiated by industry and government have the potential to address these weaknesses, but unless a national focus develops, their effectiveness will be severely limited. Transactions on Information and Communications Technologies vol 4, © 1993 WIT Press, www.witpress.com, ISSN 1743-3517 926 Software Quality Management INTRODUCTION The development of software is an activity which, like none other, has intruded all types of business. Companies of all sizes have either invested in their own software development, have contracted the work out to software vendors, or have bought shrink-wrapped software. For banks and airlines, information technology has become an essential part of business. Now more than ever, a software products industry is gaining presence in the market place. This wide dispersion of activity makes it difficult to isolate a "software industry", but all companies involved in software development have to deal with a common set of problems, the so called "essence and accidents" of software engineering de- scribed by Brooks^ . So whether a company is developing mission-critical, in- house or shrink-wrap software, all these activities will be considered to be part of a nation's software industry. THE MEANING OF NATIONAL COMPETITIVE ADVANTAGE While data, such as those related to fiscal policy, growth rate and total economic output, are often used to characterize a nation's competitiveness, analysis of na- tional competitive advantage in particular industries requires a more focussed look at the factors that have a direct bearing on the industry in question. Porter's* Competitive Diamond (Figure 1) provides a framework suitable for analysing these factors, providing a focus for four essential determinants of competitive advantage. The four determinants of the model are: 1) factor condi- tions, 2) demand conditions, 3) related and supporting industries, and 4) firm strategy, structure and rivalry. Two other factors, chance and the role of gov- ernment, are dealt with as elements that have a bearing on competitiveness, but are considered incapable of creating or destroying advantage on their own ac- count. In the following description of the model, the emphasis is on describing the individual determinants, but it is important to remember that interactions between determinants are common. Examples of interactions are shown in fig- ure 1. Factor Conditions Factor conditions are those inputs that are necessary for a country to compete within an industry and typically include the nation's endowments of human re- sources, its financial dynamism and its access to raw materials. High-technol- ogy industries are more dependent on advanced factors, such as the communica- tions infrastructure, in contrast to resource based industries which are more de- pendent on basic factors, such as natural resources. In the case of software development, the availability of highly trained per- sonnel and a strong educational system with an emphasis on science and tech- nology are of particular importance. A factor that is peculiar to the software products segment relates to the difficulty of obtaining new venture financing, a Transactions on Information and Communications Technologies vol 4, © 1993 WIT Press, www.witpress.com, ISSN 1743-3517 Software Quality Management 927 result of the fact that the primary assets of a software development company are often intangible human resources, which present little security to new venture fi- nanciers. Firm Strategy, Structure and Rivalry »strong cultural influence »tradition of rivalry competition opportunity for for best differentiation workers based on quality T geographic proximity Factor Conditions Demand Conditions • skilled workers •quality of demand »advanced educational • market segmentation system • access to markets • venture capital available specialized ndemand for educational ew products institutions Related and Supporting Industries • high-technology industries »potential for application software Figure 1. Diamond Model with factors for the software industry Demand Conditions While high overall demand in manufacturing has obvious benefits in the estab- lishment of economies of scale, for highly sophisticated products or services, such as software, other demand factors are equally as important as the quantity of demand. In the area of customized software development, where development and maintenance costs are frequently considered two distinct activities, the entire supply/demand relationship between contractors and clients is of particular im- portance. Too often, contracts are let based on the price of development alone, thereby allowing contractors to give lower priority to maintenance considera- tions. The result is an adverse impact on life-cycle quality. While this approach may provide short term cost advantage, this situation is a serious impediment for Transactions on Information and Communications Technologies vol 4, © 1993 WIT Press, www.witpress.com, ISSN 1743-3517 928 Software Quality Management an industry striving for high quality, and ultimately can have a detrimental affect on their competitiveness. Demand segmentation is another important factor for software product devel- opers. Demand segmentation allows for the development of niches, thereby opening up opportunities for entrepreneurs, increasing the overall level of com- petition, especially for companies that are located close to each other. Finally, advances in high technology are driven by innovation, and while in- novation is as likely in one market as any other, successful productization re- quires access to markets that will accept the product. Since software is easily exported, it is tempting to suggest that software could be developed in locations geographically remote from the intended market; while this is true to some ex- tent, it is dangerous to consider this a general rule for reasons which will be ex- plained shortly. Related and Supporting Industries Related and supporting industries are the creators of the diversity which leads to specialization and the making of entrepreneurial opportunity. Also, when related and supporting industries are located in close geographic proximity, opportuni- ties for networking are enhanced and natural synergies between one industry and another can develop. This determinant is a very strong driving factor for the creation of a healthy and competitive industry, but to be fully effective, the related and supporting in- dustries must be geographically close at hand. In the context of software devel- opment, this presents an apparent contradiction with the notion that software can easily be developed in locations which are remote from the intended market. The key to resolving this contradiction, is that either related or supporting indus- tries should be close at hand. Related industries for software typically include the manufacturing of computers and telecommunications equipment. Supporting industries, or more often, industries that software supports, would be industries that have a heavy reliance on software services, such as the airline or banking industries. Hence, while the goal of a software development company could be penetration of international markets, in order to gain the advantages of this de- terminant, one or other of these factors should exist in the same geographic re- gion. Firm Strategy. Structure and Rivalry The determinants already discussed are largely independent of national cultural factors. However, in the areas of firm strategy and structure, the influence of national cultural factors, such as management style and employee expectations, have a more direct effect. One such difference is an emphasis on group achievement in