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Five Forces Analysis

2218 words - 9 pages

Analyzing Software Industry Using Porter's Five Forces ModelAbstractMichael E. Porter is a leading author on competitive strategy of an industry. He is recognized as the father of modern strategy. He is also provides consultation to countries, companies and non-profit organization. He introduced the competitive forces that shape the strategy of an industry. Porter suggests that the five factors namely, internal rivalry, barriers to entry, supplier power, buyer power and threat from substitutes, when applied on an industry helps to reveal the competitiveness in that industry. This paper applies Porter's five forces to Software industry and explores the characteristics of the industry.Market DefinitionThe Software industry includes the business of developing, marketing and selling software products. The software products can range from system software to smart phone applications. Software companies sell the licenses for these software products as well as provide technical support for the product. Another source of revenue for these companies is consultation services to their end users such as customized development, deployment and integration operations. As the internet capabilities are growing day by day so is the software industry business products. The industry's revenue generation is experiencing a shift from software products and license fees to Software as a Service, commonly known as "SaaS" and Cloud Computing. This business model keeps the intellectual property with the company and at the same time provides the end users with a convenient way of using the product/service. In order to study the market and the industry the software companies can be differentiated as the ones that provide software service and the ones that provide software products.IT Software market is pretty concentrated among the top 20 companies capturing approximately 75% of the market share. Combined revenue of top 3 companies, Microsoft, IBM and Oracle is US 124.4 billion, representing approximately 33% of the total market share. These big companies capture the market by providing the products such as computer operating systems, gaming console etc., and these products are used by other suppliers to facilitate their clients with customized software services. When it comes to the software product market, it is largely dominated by few big companies. Whereas in case of software service providers, which doesn't require much of a setup cost the small companies also have a significant amount of market share.Source: Gartner (March 2014)PORTER'S FIVE FORCES APPLIED ON SOFTWARE INDUSTRYFigure 1INTERNAL RIVALRYIntensity of rivalry is one of the main forces that define the competitive behavior of an industry. Michael Porter defines internal rivalry as the pressure that competitors in an industry put on each other and limit each other's profit (Porter,2008). When the rivalry among companies is low the industry is considered disciplined. When a competitor company reacts due to an...

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