The Information Technology Industry

The world has made immense strides in recent years with economic progress linked to the
explosion in Information Technology (IT), accompanied by globalization led shrinking of national
boundaries. Physical borders no longer define markets and organizations have the freedom to
source products from the lowest cost locations. The Indian information technology industry has
not only been among the fastest growing industries globally, it has played a key role in
transforming India from a largely inward looking economy to an emerging knowledge power
that is being recognized as one of the most dynamic and entrepreneurial in the world. As
Dahlman and Utz (2005) note, ‘the success of the IT industry on the whole influenced
competitiveness in other sectors as well by building confidence in Indian industry, enhancing
the country's brand equity in the world, and offering entrepreneurial opportunities on a global
scale'. The success of this industry has had profound effects on the political decisions, economic
growth, social outlook and norms, and technological structure of this nation apart from being a
prime mover of the Indian economy. This industry's contribution to the country's GDP has
increased from 1.4 per cent in 2001 to about 7 per cent in 2009 and is expected to contribute
nearly 20 per cent of incremental GDP growth between 2001 and 2009. The industry, which
employed 0.8 million people in 2001, is expected to employ over 2 million people directly and
create direct employment opportunities for at least an additional 2 million people by 2008
(Nasscom, 2002). This report shall present an analysis of the industry landscape of Indian
Information Technology industry using analysis frameworks and tools such as SWOT Analysis,
Porter's 5 Forces Analysis etc. We shall focus on the Big 5 of Indian Information Technology
Industry that includes - TCS, Infosys, Wipro, HCL Technologies Ltd, and Mahindra Satyam.

We shall analyze the industry landscape:

The primary driver of the growth and expansion of software industry in India has been cost. The
cost of a developer in India varied from $17,000 to $25,000 annually. The cost of sending the
same developer to the US came to about $32,000-42,000 per annum. Compare this with US
developer rates of about $60,000-140,000 yearlythe cost proposition was clear.
In a world where information technology has become the backbone of businesses worldwide,
‘outsourcing' is the process through which one company hands over part of its work to another
company, making it responsible for the design and implementation of certain business process
under the requirements and specifications of the outsourcing company.

Industry Structure - Identify key elements of industry's structure:

1. Main players - the Indian software industry is dotted with numerous players
however, the large firms with more than USD 1 billion of annual revenue are TCS, Infosys
Technologies, Wipro Technologies, HCL Technologies, and Tech Mahindra. These can also
be denoted as the Big 5 of Indian software industry landscape. Next come the mid-tier
firms those whose revenue have been between 500 million to 1 billion dollars. These are
EDS Mphasis, Patni Computers etc. At the next rung are firms with revenues between
250 million and 500 million dollars. However, the industry landscape is dotted with
numerous small firms who perform tasks outsourced by the big 5 firms. These
organizations are also the producers of software services.
2. Producers - given above
3. Customers - the main customers of Indian software industry are United States based
Fortune 500 firms, Fortune 5000 firms, companies based in UK, Japan and from other
geographies as well. Other big customers include the Indian government and other Indian
firms, and agencies.
Employees not unionized.
The Indian Software industry can be perceived to an Oligopoly with near perfect competition
with many players dotting the industry landscape.

Product life cycle analysis

Total World IT market is - trillion, there is a lot of scope for growth both within the domestic as
well as export markets. Hence, we can conclude that the Indian IT industry is in a growth phase.

The Structure of Competition in Industry

The Indian IT industry is in a state of perfect competition with thousands of companies dotting
across the country. There are no Entry and Exit barriers. It is easy to enter this industry and exit
if the need arises. Product differentiation is low as most players offer similar services, which can
be taken to be homogenous. There are no impediments to information flow.
KEY DOMESTIC PLAYERS:
1. Tata Consultancy Services:

•Revenues of US$ 5.94 billion in 2008-09, recording a three per cent growth over revenues of
US$3.79 billion in 2007-08

•Profitability (operating margin) for the year (2008-09) was at 25 per cent of revenues

•Workforce of over 126,150 professionals by 2008-09, with growth of 17 per cent over 2007-08
employee base of 107,698
Service lines

TCS' services are currently organised into the following service lines (percentage of total TCS revenues in
the 2011/12 fiscal year generated by each respective service line is shown in parentheses):

 Application development and maintenance (44.75%);

 Asset leverage solutions (3.84%);

 Assurance services (7.45%);

 Business intelligence (4.55%);

 Business process outsourcing (11.04%);

 Consulting (2.58%);

 Engineering and Industrial services (4.62%);

 Enterprise solutions (11.11%); and

 IT infrastructure services (10.06%).

2. WIPRO:

•Revenues of US$ 5.58 billion in 2008-09 recording a 12 per cent growth over revenues of US$
4.96 billion in 2007-08

•Profitability (operating margins) for the year (2008-09) was at 18 per cent of revenues

•Workforce of over 97,810 professionals by 2008-09, with growth of 19 per cent over 2007-08
employee base of 82,122

3.Infosys:

•Revenues of US$ 4.40 billion in 2008-09 recording a 13 per cent growth over revenues of US$
3.88 billion in 2007-08

•Profitability (operating margin) for the year (2008-09) was at 34 per cent of revenues

•Workforce of over 104,900 professionals by 2008-09, with growth of 15 per cent over 2007-08
employee base of 91,187

4.HCL:

Revenues of 77555 million rupees in 2008-09 as compared to 65246 million rupees in 2007-08
Operating margin was 22% of revenues. Workforce of over 54026 professionals by 2008-09

5.Tech Mahindra:

Revenues of 44647 million rupees in 2008-09 as compared to 37661 million rupees in 2007-08
Operating margin was 29% of revenues. Workforce of over 24972 professionals by 2008-09

INTERNATIONAL PLAYERS
Google still makes the bulk of its revenue through advertising, but its non-advertisement
revenues are growing at a spectacular rate, in particular its software revenues. Hence Google
leads the fast growth list. Google's assets stood at $31.768 billion and it recorded a stupendous
revenue growth of 455%. Google has announced launched a series of new products like Google
Chrome browser, the upcoming Chrome OS and Google Wave and is expected to be the global
IT leader in near future.

Microsoft Corporation is a leading player in the International IT scene with a host of software
services. With its Windows operating system Microsoft rules the operating systems market.
Other successful products include MS Office, MS Servers, MS developer tools, Business
software, Games and X-box. Recently Microsoft launched its latest version of Windows OS,
Windows 7.Its revenues stood at $58.437 billion in 2009 and total assets worth 77.888 billion

Yahoo! Inc- Founded by Jerry Yang and David Flio Yahoo Inc. is an American public corporation
headquartered in California that provides Internet services worldwide. The company is perhaps
best known for its web portal, search engine (Yahoo! Search), Yahoo! Directory, Yahoo! Mail,
Yahoo! News, advertising, online mapping (Yahoo! Maps), video sharing (Yahoo! Video), and
social media websites and services. Its revenues stood at $7.208 million in 2008 with total
assets worth $13.689 billion. In recent times Yahoo resisted attempt of takeover by Microsoft.

Apple Inc- Apple Inc was founded in 1976 in California by Steve Jobs and Steve Wozniak.
Headquartered in California, Apple manufactures consumer electronics and computer software
products. The company's best-known hardware products include Macintosh computers, the
iPod, and the i-Phone. Apple software includes the Mac OS X operating system, the iTunes
media browser, the i-Life suite of multimedia and creativity software, the iWork suite of
productivity software, Final Cut Studio, a suite of professional audio and film-industry software
products, and Logic Studio, a suite of audio tools. It has assets worth $39.78 billion and
employees around 35000 personnel worldwide.

Intel Corporation – Founded by Gordon Moore and Robert Noyce Intel is the leading producer
of semiconductor chips. Its Pentium brand of microprocessors are widely used across the PCs
around the world and it enjoys a big share in the PC microprocessor market. Intel was an early
developer of SRAM and DRAM memory chips. Its other products include Flash memory,
Motherboard chipsets, Network Interface Cards and Bluetooth Chipsets. In 2008 it earned
revenue of $37.58 million and its total assets stood at $50.715 billion and employees over
83000 people worldwide.

The Market can be divided into the following segments:

1. IT services
2. Engineering Services,S/W products and R&D
3. BPO
4. Hardware
From the graph given below it can be noticed that growth of IT services is much more
compared to other market segments. To sustain this growth the strategy should be
a. Expansion into varied verticals
b. Well differentiated service offerings
c. Increasing geographic penetration
d. Expanding to tier 2 and tier 3 cities
I. Threat of Substitutes: MEDIUM

1. Other Software locations such as Eastern Europe, the Philippines and China are
emerging and are posing threat to Indian IT Industry owing to their cost advantage.
However, this should have an impact from medium to long term.
2. Price quoted for projects is a major differentiator, the quality of products being the
same
II. Barriers to Entry: LOW

1. Low capital requirements.

2. Large value chain space for small enterprises.
3. MNCs are ramping up capacity and employee strength.
E.g. When the industry is emerging, like in Internet industry, companies like You Tube (which got
acquired by Google for close to 1.6 billion dollars) can enter and establish themselves in less
than two years.

III. Rivalry among firms: HIGH

1. Commoditized offerings.
2. Low-cost, little differentiation positioning.
3. High industry growth.
4. Strong competitors.
5. New Products: Google introducing its chrome OS against Microsoft. Microsoft
fighting back with Bing Search Engine.
6. Price Discounting: When mid-sized Indian consulting firms like TCS and Wipro
introduced off-shoring by charging lower prices per consultant, big IT consulting houses
like IBM and Accenture had to hire IT professionals in India and charge similar prices per
consultant. Other big IT consulting firms like EDS who had not been aggressively hiring in
India could not compete as effectively in terms of pricing, because they did not enjoy the
labor arbitrage which firms having a large number of consultants in India enjoyed.
Intensity of Rivalry:

The top three players Infosys,TCS and Wipro are almost of the same size .The intensity of rivalry
is hence very high.

Price Based Rivalry:

Homogenous service: As service provided by the top 3 is more or less homogenous there exists
a price war while bidding for projects.

Buyer Switching Cost: Clients face low switching cost in shifting a project from one company to
the other.

IV. Bargaining power of Suppliers: Shift from High to Low

1. Due to slowdown, the job-cuts, the layoffs, and bleak IT outlook.

2. Demand and Supply of IT professionals no longer that favourable to employees.
3. Availability of vast talent pool - fresher’s and experienced.
4. IT has always been a cost centre in a business. Once the Y2K hype was over and we
entered the new millennium, it became clearer that the buyers of IT consulting services had
the upper White Paper on Information Technology Sector hand, as opposed to the suppliers
of these services. Consequently, the suppliers had to hire overseas, particularly in India, and
succumbed to the off-shoring trend currently underway.

V. Bargaining power of Customers: Very High

1. Large number of IT companies vying for IT Projects - resulting in high competition for
projects.
2. Huge decline in IT expenditure - Indian IT companies are dependent on United States
and on BFSI sector in particular for majority of its revenues, and with the recent financial
crisis, new spending from this source has reduced considerably.
3. For existing products and services, the clients continue with the old companies.

4. Lack of differentiation among service providers

5. Cut throat Competition
6. Low switching costs
7. Buyer Concentration:
BFSI contributes almost 42% towards the revenues of Indian IT firms. They easily play against
the industry participants.

Marketing strategies for product software:

Marketing strategies assist software firms to determine the type of market analysis that is
needed for decision-making. Two general strategies that are well known in the marketing
discipline are:

• marketing mix; and

• relationship marketing.

"Marketing mix" is the typical strategy for traditional mass marketers of product software in
competitive markets. Structured market research, and agility in reacting to sales, are
characteristic of their product development process.

"Relationship marketing", (closely associated to CRM), is used by product software companies

who focus on long-term customer relationships.

SWOT Analysis
Strengths:

1. Leadership in sophisticated solutions that enable clients to optimize the efficiency of

their business.
2. Proven ‘Global Delivery Model'.
3. Commitment to superior quality and process execution.
4. Strong Brand and Long-standing client relationships.
5. Ability to scale Innovation and leadership.
Weaknesses:

1. Excessive dependence on United States for revenues - 67% of revenues from USA.
2. Too much dependence on BFSI (Banking Financial Services and Insurance) sector.
3. Low R&D spends as compared to global peers.
4. Low expertise in high-end services such as Consultancy and KPO.
Opportunities:

1. Plenty of scope for Indian Software industry to tap Global IT spending of 1.7 trillion
USD.
2. Indian domestic market set to grow by 20%.
3. Can expand into newer geographies such as - Latin America, Nordic nations, middle-
east market, Japan, and Western Europe.
4. Creating near shore offices and development centers in cost advantage countries
such as - Latin America and Eastern Europe.
Threat:

1. Global IT slowdown that may continue for some more years, will lead to lower IT
spending.
2. Increased competition from foreign companies such as - IBM, HP.
3. Increased competition from low-wage countries such as - China.
4. US government is against outsourcing of IT contracts.
5. Shrinking margins owing to rising wage inflation, currency fluctuations affects
revenue and hence margins.
6. Breakup of total Global IT Spending
7. Financial attractiveness of software locations
8. India IT Sector - Market Size
9. Contribution of India IT Industry to GDP
10. Number of employees in IT Sector (Direct Employment)
11. Market share of various Indian IT Firms
12. Sources of Revenue
13. Software Exports Revenue by Global Geography
14. R & D Spending of IT Majors
15. Established IT hubs

Threat of new entry:

The barrier of entry which lies in some industry does not exists in IT or software services
industry. Software Company can be started with very less capital investment. It basically needs
computer and the knowledge to do software. Because of this low barrier to entry and high rate
of success, competition tends to be acute.
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McLaney, E. and Atrill, P. (2008) Accounting An Introduction, London: Prentice Hall

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Publishing

Dahlman, C. and Utz, A (2005) India and the Knowledge Economy Leveraging Strengths and
Opportunities, Washington, D.C.: The World Bank
http://www.mckinsey.com/mgi/reports/pdfs/india/Software.pdf

http://www.moneycontrol.com/financials/infosystechnologies/balance-sheet/IT