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A strategic study about an I.T industry sector in India

By Group 6

Abhishek V

Nidesh M

Raghavendra A

Shusant Kumar jha

Vyas V A

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Index

Introduction 3

Strategies a Firm use 4

SWOT analysis 5

External analysis (strengths and weaknesses)

Internal analysis (opportunities and threats)

Porters five force model 8

Threat of new Entrants

Rivalry among existing players

Bargaining power of buyers

Bargaining power of sellers

Threat of substitutes

PESTEL analysis 9

Political Trends

Economical Trends

Social Trends

Technological Trends

Environmental Trends

Legal Trends

Corporate Level strategy 13

Horizontal integration

Vertical Integration

Strategic Outsourcing

Related Diversification

Unrelated Diversification

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Business level Strategy 15

Cost Leadership

Differentiation strategy

Focused Cost Leadership

Focused Differentiation

Integrated cost leadership/Differentiation

Functional level strategy 17

Product Development strategy

Market Development strategy

Operational Strategy

Merging strategy

Human resource strategy

Conclusion 20

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Introduction:

IT sector in India has increased at an incredible rate of 35% per year for the last 10 years

reinforces the view that India is world class in IT In IT services, India is emerging as one of

the most preferred destinations for BPO‟S. It is playing an important role in economic

development in a broader sense, beyond just economic growth. The IT sector is one of the

largest employers of women, and therefore, can play a crucial role in women empowerment

and the reduction of gender inequalities.

Over the past few years, India’s top software companies have acquired foreign firms to

increase their local presence in the US and Europe, their main markets, or to acquire

employees with a specific skill set or strengthen their capability in a particular sector

Top 5 IT companies In India

TCS: - It is the largest IT employer in India, with more than 316,000 employees.

INFOSYS: - it has more than 1, 64,850 employees.

WIPRO: - it has carved a unique position in the outsourcing company operates from 10

different locations. It has more than 98,000 employees.

COGNIZANT:-it is a Forbes global 200 companies, and is a member of fortune 1000, and is

ranked among the information technology companies.

HCL TECH-It has more than 54,000 employees and HCL‟S BPO‟S focuses on sectors like

telecom, retail, banking and financial services.

Current Employment in IT And ITES Industries the Indian IT and ITES industry currently

employs about 2.2 million persons in comparison to 0.8 million in 2004. In the context of

growth forecasted for the industry, availability of skilled human resource supported by

appropriate skill building initiatives will be Key to this growth. In the near term, it is

expected that the IT and ITES industry can achieve an export target of USD 60- 62 billion by

FY 2014, employing 2.5-3 million professionals directly in the export segment and

contributing substantially to the socio-economic development of the country.

“Indian IT companies have thoroughly realized the value of making strategic cross-border

acquisitions as demonstrated by Infosys Ltd’s acquisition of Lodestone, MphasiS Ltd’s

acquisition of Digital Risk Llc and Wipro Ltd’s acquisitions of Promax, and we believe the

cross- border activity is expected to increase in 2013,” said Arunkumar Krishnamurthy,

partner (transaction advisory services) at Grant Thornton India.

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Strategies a firm uses

Strategy is a set of related actions that managers take to increase their company’s

performance

Phases of strategy

Strategy Leadership

Strategy formulation

Strategy Implementation

The following figure gives the description on flow of strategy evolution to implementation

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SWOT ANALYSIS

STRENGTHS

Large Pool of Knowledge Workers: The basic raw material for any software development

activity or a dotcom start up is the availability of quality knowledge workers. India's main

competitive advantage is its abundant, high-quality and cost effective human resources.

Currently, India trains more than 20 million professionals a year and has around 40% of them

working in the software and services sector. This is the second largest I.T. work force in the

world. NASSCOM says that Indian IT workforce will touch 30 million by 2020, becoming

the highest sector employer

State-of-the-art Technologies: A majority of Indian software companies use state-of-the-art

technologies, including the latest in client-networking, E-commerce, Internet, ASP, CASE

tools, communication software, ATM, protocols, GUI etc.

Flexibility and Adaptability: Indian software professionals easily adapt themselves to new

technologies. In the software industry, where technological obsolescence is the order of the

day, flexibility to adapt to new technologies a major strength

Reliability: Software programmers from India are able to provide expertise for all or large

projects with dollar savings. The motto is ultimate adherence delivery schedules and

customer satisfaction

Off-shore Development through Datacom links: Off-shore software development in India

especially through high-speed datacom (satellite links), provides immense cost and time

saving.

Large Projects: Indian companies increasingly large numbers are demonstrating their ability

to handle large projects (more than 500-700 man- ears), including turnkey projects.

High Growth: Software exports as well as the domestic demand in the last few years have

been consistently growing at annual growth rate of about 50 per cent.

High Quality & Price Performance: Quality is the hallmark of Indian I.T. software and,

services. ISO 9000 certification and SEI Level 5 are the order of the day. High quality

knowledge workers and attractive price performance have been and will continue to be a key

component of India's value proposition.

Engineering Base: A strong base of national institutes, engineering college and universities

has laid a strong foundation of education in engineering skills amongst Indian software

professionals. The IIT’s (Indian Institute of Information Technology) in various cities are the

new institutions to join the bandwagon.

Mathematical and Logic Expertise: India’s success in providing efficient software solutions

can be also attributed to the mathematical and logical ability Indian’s.

High Aspirations: The Indian IT software and services industry has set itself higher

aspirations and goals. The recent aspiration is to reach annual revenues of U.S.$ 7.50billion

by 2020 (from a level of U.S.$3.9 billion ), achieve 100 per cent literacy, more, employment

and entrepreneurship opportunities.

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Indians in Silicon Valley: As per a recent survey, 23 of the Fortune 500 company CEOs are

of Indian origin. It has been reported that a business plan of a dotcom company in Silicon

valley, U.S.A. receives higher priority if an Indian name associated with it. The successful

India in Silicon Valley has organise themselves under the Indus Entrepreneurs Group (TiE).

Government Encouragement: Since 1999 the Government of India has accorded thrust area

status to the software sector. The Government has amended the Copyright Law to make it one

of the toughest in the world; eliminated import duty on computer software; exempted profits

derived from software exports from Income Tax etc. The Government of India has also set up

innovative scheme like Software Technology Parks, etc., for promoting software exports.

Infrastructure: A growing number of State Governments and cities are building hi-tech

buildings and habitats to accommodate the ever increasing numbers of software companies

and enterprises. These are in the form of intelligent habitats and buildings and include

infrastructural support like high- class value-added data communication services, captive

power, recreational facilities, etc. They incorporate state-of- art facilities viz. plug-and-play

features. This is assisting companies to quickly set up their software operations in India.

Global Research & Development: More and more multinationals are setting up their global

R&D units in India, recognising the immense power of local talent.

WEAKNESSES

Lack of Package Orientation: Although, a few companies have started making shrink-

wrapped software packages, the industry as a whole is still not oriented towards development

of world class 'shrink-wrapped' software packages. Thus, the industry is not able to take

advantage of a multiplier effect for growth in revenues.

Lack of Domestic Computerisation: Lack of adequate computerisation has led to a relatively

weak domestic software market. Even, the PC penetration rate is very low.

Lack of Internet Penetration: With low penetration of PC’s, it is obvious that Internet

penetration is also poor. At the end of the year 2014, India could only boast of Internet

connections with about 243 million users. The penetration by 2014 is only 19.19%, while US,

Japan and UK have more than 85% internet penetration

Original Technology: The Indian software industry possesses the expertise to absorb and use

the latest technology. However, barring a few exceptions, it has still not produced enough

original technology breakthroughs. Succinctly put, the industry has not created original

operating systems or new computer languages and technologies, which could be used

globally.

Mission Critical Real Time Operations: Some of the leading companies in India have handled

software development for mission critical real time operations. However, the industry as a

whole does not have much experience in this field.

Project Management Skills: As the Indian software industry has been growing at a fast rate,

most of the project managers are becoming entrepreneurs, thus creating a gap in demand and

supply of project management skills.

Venture Capital: In building a robust venture creation process, India still faces few

constraints. To build a prolific venture community, India needs to focus on boosting all stages

of venture creation process and have simplified procedures so that the domestic Venture

Capital movement can flourish and overseas Venture Capital funds can be attracted.

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Internet Service Provider (ISP) Policy: Localisation: With the exception of isolated cases, not

much exists in providing software applications in innumerable local languages. Thus,

computer penetration in India is restricted to merely the English speaking population.

OPPORTUNITIES

Global Market: The market is large and rapidly changing-from a mix of legacy client server

to web / package-based services. Market openings are emerging across I.T. services, software

products, I.T. enabled services and E-businesses, and creating a number of new opportunities

for Indian companies.

Domestic Demand: According to the NASSCOM estimates, analytics will present a $7.5bn

opportunity – including domestic demands and exports by 2020 for Indian IT companies

Outsourcing: The global outsourcing business was worth U.S.$ 170 billion in 2008 and has

been growing at the rate of 15-18 percent per annum. A recent survey indicates that by 2020,

more than 75 percent of the Fortune 1000 companies and other multinationals will outsource

some part of their application development and maintenance activities. India can gain and

corner a greater marketplace.

E-Commerce/E-Business: India not only has a huge opportunity to service this market but

also has a unique opportunity to address the needs of the NRI community around the world.

Overseas Listings: India today commands a very high respect among investors in India and

overseas. Almost all major overseas stock exchanges -are keen for Indian software companies

to list themselves on their respective exchanges. This is a major opportunity for the Indian

software industry to attract the requisite investments.

The permission to allow private ISP's operate in India and set up their own gateways will

unprecedented Internet proliferation throughout India. Moreover, the internet penetration

grew by 14% in 2014 compared to 2013

THREATS

Government Interference: In the past decade, the Government and industry have worked very

well together in India for the success of the I.T. software and services industry. Now the

Government's role needs to be increasingly directed towards providing suitable infrastructure

and continuing its role in the simplification of policies. Any further plans for Government

control, restrictions or undue interference could well pose a threat to the industry.

Telecom Infrastructure: The immediate need of the hour in India is to have a world class

telecom infrastructure at globally competitive tariffs. The Department of

Telecommunications has taken a number of initiatives including the National

Telecommunication Backbone, National Internet Backbone, and plans for providing high

bandwidth Internet connectivity to remote corners of India. However, Government

monopoly, lack of speed and adherence to archaic telecommunication rules and regulations

can prove to be a threat to the industry.

Lack of Speed: The world is moving at the speed of Internet. The decision- making and time

taken for implementation in India needs to be at a much faster pace so that the Indian I.T.

software and services industry does not lose any opportunities.

Infrastructure: Although, the software industry is growing at a phenomenal rate, many other

sectors in India have not yet been able to keep pace with it. Lately, almost all major cities are

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building hi-tech buildings to house the software industry. These buildings have state-of-art

infrastructure, data communication facilities, captive power etc. But, lack of power,

highways, housing and international airports is some cities has become a major constraint.

Cost: Rising cost of infrastructure, basic amenities and salaries can pose a threat if not

adequately balanced with value addition.

Protectionism by Export Destinations: Many countries in North America and Western Europe

are creating protective and non-tariff trade barriers, especially with regard to the movement

of skilled manpower. Visa issues and non-tariff trade barrier may prove to be a threat. India

should insist for removal of non-trade tariff barriers at WTO.

Porter’s five force model for IT Industry

Threat of New Entrants:

The I.T. Industry is a lucrative industry which attracts many entrants as it shows a rapid

growth and profit margins earned per projects. But it displays high entry barriers to new

entrants as it works on the principle of cost advantage and economies of scale, so the entry

barriers are high. Any new comer in the industry can face a huge retaliation from existing

players. The best way for a new entrant in this field to be successful would be if they had a

brand new idea for a product or service; the lack of differentiation in the industry is one thing

a newcomer could exploit.

Overall, the IT industry isn't overly attractive, but it is routine and profitable enough that a lot

of people try and enter it.

Rivalry among Existing Players:

The IT industry is known for its rapid growth, effectiveness and competition. A main reason

why many new entrants are not successful is the intense rivalry between existing players.

Large companies in this industry benefit from economies of scale, which is valuable and

something they try very hard not to lose. Products in this industry are well branded and tend

to have a strong customer base. Market share is unevenly distributed among existing players,

who are often in various kinds of legal and advertising battles with one another.

As earlier said, there is no differentiation exhibited in this industry, so the rivalry is intense

for acquiring the market share.

Bargaining Power of Suppliers:

IT firms are very important to suppliers because they are their primary customers, but I

believe suppliers are even more important to buyers (IT firms). The inputs in this industry are

pretty standard, with differences being speed, memory etc. Though the inputs are standard,

new companies find it difficult to enter this industry as a supplier because of the existing

relationships between current suppliers and IT firms, the ever changing and improving

technologies of the world and the intense rivalry between existing players. Suppliers are not

"locked" into deals with specific firms but most of the relationships between the firms and

suppliers in this industry are well established, and these suppliers would most likely not want

to end their relationships with firms in the first place.

Many projects accepted by IT firms are based on the comfort and the ease of the technology,

service provided by their suppliers. So the suppliers have better hand in bargaining

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Bargaining Power of Buyers:

In an industry as massive as Information Technology, the term "buyers" refers to almost

everyone in the world. While there are countries that are behind technologically, a majority of

locations in the world have access to computers and the internet etc. Given the large number

of buyers, it is safe to say that the customers control the IT industry. There are so many

choices for a buyer and there are minimal switching costs, so customers aren't typically

"locked in" to one firm. Also, because a lot of IT sales come from companies that make large

purchases, those companies are powerful and important to the IT firms. Customers are

sensitive to price, but IT products and services are necessary to the success of businesses, so

they are willing to spend a lot of money to get a good product. There are typically many

interactions between buyers and IT companies because of the need for training to use

products, constantly upgraded technology and an abundance of advertising.

Generally IT firms tend to stick to their profit margins, but some do keep long term relations

in mind and do accept projects lesser than the profit margin estimated .

Threat from Substitutes:

There is not much of a threat from substitutes to the IT industry, mostly because there aren't

true substitutes. We live in a digital age, so we rely on IT to run our lives and businesses. An

example of a substitute would be a scientific calculator, but to compare the two is a stretch.

Nothing can really replace all that computers do for us as a society.

Although the software has no substitute, there are traditional methods which can replace the

smaller projects.

PESTEL ANALYSIS OF IT INDUSTRY

Political Trends:

This past presidential election was posed to be very impactful on the information technology

industry. DLA Piper, a law firm, recently released a survey on technology leaders’ opinions

on the Presidential election, which candidates they’d like to see win, and how such a victory

could help the technology industry (The IT Industry Gets into the Political Swing of Things,

2013.) The so-called Bush-era tax cuts, which are set to expire, next year, are integral to

technology investment. According to the study, 60 percent of IT leaders say that if the cuts

are allowed to expire, investment in the technology sector will decline. Obama will allow the

cuts to expire, while Romney would probably have extended them realizing how important

the Industry is to the sustainable growth of the country. Looking at market opportunities,

DLA Piper found that IT respondents ranked mobile computing as their biggest future

opportunity. Most respondents believed that even if Obama was elected, the Industry is far

too powerful and growing too rapidly for such a policy expiration to cause any detriment to

the sector.

Economic Trends:

The information technology Industry is one of the fastest developing markets in the United

States and is a key factor in driving the growth of the economy. Information technology, and

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the hardware and software associated with the IT industry, are an integral part of nearly every

major global industry. The information technology (IT) industry has become of the most

robust industries in the world. IT, more than any other industry or economic facet, has an

increased productivity, particularly in the developed world, and therefore is a key driver of

global economic growth. Economies of scale and limitless demand from both consumers and

enterprises give a snapshot of this rapidly growing sector. Economies of scale in the

industry means that the marginal cost of each unit of additional software or hardware is

insignificant compared to the value addition that result from it. The IT Industry is knowledge-

based; therefore efficient utilization of skilled labor can lead to a rapid pace of economic

growth. Looking at the economy as a whole, 72 percent of technology leaders say that they

expect their companies’ sales to increase over the next year.

Social Cultural Trends:

The information technology industry is one that thrives off people’s need to have the latest

and most up to date gadgets. People like to be seen with the latest and greatest in information

technology to look as though you are ahead of the game. You are seen as being cool and a

trend setter if you have the newest computer or tablet. It seems to be a generational wide

trend to be on the technology bandwagon. The trend also seems to be that smaller is better.

From the time this industry began that housed computers that took up entire rooms to today’s

computers that can be made to fit in your hand, there has definitely been a trend to downsize

things. This seems to be the trend industry wide now for the most part. In the automobile

industry the cars are getting smaller, the telecommunications industry the phones are getting

smaller.

Technological Trends:

In the industry titled information technology; there are several technological features that

influence the industry. First, technology is growing at a rapid rate, if you look at the past 10,

15, and 20 years and look at how far technology has come, it is remarkable. Technology is

money, so it’s a race to see who can figure out the newest trend that’s going to change how

society thinks about things. The industry does not show any signs of slowing down anytime

soon so the possibilities are endless.

TELEPHONY:

Cellular mobile telephony tariffs in India are the lowest in the world. A comparison of Indian

cellular tariffs vis-à-vis the tariffs prevailing in comparative emerging economies in South

America & Asia-Pacific region, clearly brings out the affordability of Indian cellular mobile

telephone services.

The airtime tariffs have plunged by over 75% in the last three years alone. According to the

TRAI, the average monthly rental and airtime being realized for cellular services stands at Rs.

202 and Rs. 1.99 per minute respectively. Prepaid services have been introduced by all

operators at an extremely affordable tariff of Rs. 300 per month. Roaming charges have been

cut by 70% down from Rs.10 to Rs.3 in early 2002 and now to as low as Rs. 1.50 by several

service providers. India has the second largest telephone network after china.

Teledensity - 19.86 %

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INTERNET: India had as on September 2008 45.3 million active internet users. This is an

internationally accepted benchmark for enumerating internet users. Urban users continue to

dominate internet use contributing to 42 million of the 45 million odd users. In September

last 2007, the number of active internet users in urban India was 32 million showing a year on

year growth of a little more than 30 per cent.

NEW IT TECHNOLOGY:

With the evolution of SOA and semantic web services, enterprise solution heeds to the

limitations of conventional enterprise systems by providing data convergence and concept

reutilization with intelligence.

Web2.O represents the next transition in the evolution of web applications; they promise to

restore the richness, interactivity and usability lacking in many web applications. As with any

technological transition, for an enterprise this implies that there are new opportunities to be

explored and new challenges to be negotiated. To maximize the benefits of Web2.O, an

enterprise should assess. SOA has benefited enterprises with benefits such as standardized

patterns, interoperability, centralized governance, easy integration etc. Almost all industry

domains have benefited from SOA strategy in order to build more flexible and malleable IT

architecture involving re-usable services. On the other hand, Web 2.0 practices like

communities and folksonomy are much centered on end-users. They involve frequent

communication among large consumers dispersed all around the world over the Internet.

They have become extremely popular among internet users. This brings the interesting idea

of bringing enterprise products i.e. services and consumer-savvy applications from Web 2.0

together.

CAD:

Computer-aided design (CAD) is the use of wide ranges of computer-based tools that assist

engineers, architects and other design professionals in their design activities. It is the main

geometry authoring tool within the Product Lifecycle Management process and involves both

software and sometimes special-purpose hardware. Current packages range from 2D vector

based drafting systems to 3D solid and surface modelers.

Environmental Trends:

It is pretty obvious in today’s society that most people are trying to be more environmentally

friendly. It has been shown that these resources we have are limited and are not going to be

around forever. Not only does it take up resources to create computers, but once they go

outdated, which could happen overnight, there needs to be a way to dispose of them. It used

to be in the United States, we could give our older models of computers to developing

nations, but now they even need to dispose of outdated computers. The actual manufacturing

of computers is very material intensive. The total amount of fossil fuels to make one

computer is equal to almost ten times what the actual computer ends up weighing. Computer

manufactures are now trying to make computers that last longer and can just be updated with

the latest software periodically to reduce the amount of waste.

LEGAL TRENDS:

This speedy growth of IT Sector is undoubtedly due to the efforts of Indian government and

the other developments that took in the other parts of the globe.

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IT Act 2000: The arrival of the Internet and the World Wide Web made it possible for people

to communicate and transact over cyber space. It was a revolutionary step for humanity, but it

also created a significant need for the regulation and governance of these activities, a

requirement that lead to the creation and implementation of cyber laws across the globe. India

became the 12th nation in the world to adopt a cyber law during 2000.

Indian Copyright Act: The copyright of computer software is protected under the provisions

of Indian Copyright Act 1957. Major changes to Indian Copyright Law were introduced in

1994 and came into effect from 10 May 1995. Copyright Act clearly explained:

• The rights of a copyright holder

• Position on rentals of software

• The rights of the user to make backup copies

• Most importantly the amendments imposed heavy punishment and fines for infringement of

copyright of software.

Income Tax: Deduction under sections 10A/ 10B of Income tax Act, 1961 (“IT Act”) in

respect of profits derived from export of computer software. Following undertakings are

eligible to claim deduction in respect of profits derived from export of computer software

under the provisions of sections 10A/ 10B of the IT Act:

• Existing units which commenced operations prior to April 1, 2000 and claimed deduction

under the provisions of erstwhile sections 10A/ 10B, can continue to claim such deduction

under the provisions of newly substituted sections 10A/ 10B for the unexpired period of ten

consecutive assessment years. Deduction would continue to be available in case of corporate

re-organizations by way of amalgamation or demerger.

Depreciation on computers and computer software at 60 percent

As per the provisions of the IT Act, annual depreciation on computers and computer software

can be claimed at the rate of 60 percent of written down value at the beginning of the relevant

financial year for income tax purposes. Therefore, under the written down value method, 84

percent of cost of computers and software can be depreciated in first 2 years.

IT SEZ Requirements:

IT companies can set up SEZ with minimum area of 10 hectares and enjoy a host of tax

benefits and fiscal benefits. Software Technology Parks of India (STPI) is a society set up by

the Department of Communication & Information Technology, Government of India in 1991,

with the objective of encouraging, promoting and boosting the Software Exports from India.

Companies operating in software Technology Park (STPI) .Scheme will continue to get tax

benefit till 2010.

STPI maintains internal engineering resources to provide consulting, training and

implementation services. Services cover Network Design, System Integration, Installation,

Operations and maintenance of application networks and facilities in varied areas ranging

from VSATs to ATM based networks.

Setting up of the Software Technology Parks of India (STPI), by the Ministry of Information

Technology, Government of India and the International Technology Park in a joint project by

the State Government, the TATA Group and the Singapore Consortium to promote and

facilitate the software exports is another major step towards the growth of Indian Information

Technology Sector.

Anti Monopoly Laws:

From the 1950s, IBM had a virtual monopoly of computers in India. The 360 series release in

1960s was the major workhouse of the large organizations. They even maintained a chain of

programmers who could write down software's for their machines. However in 1978, when

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George Fernandez, ministry of industries at that time, commanded IBM to take local

shareholders into its subsidiary, the company refused strictly and went back after winding up

its all operations in India.

CORPORATE LEVEL STRATEGY

Companies in industries around the world are in a race that gets more difficult every year,

with bigger, stronger, and more innovative competitors. This is the current scenario in the IT

industry. the rules of the race are constantly changing with the emergence of electronic

business, globalization, disruptive technologies, innovation and convergence of industries.

Competitors who have been in other races suddenly join your race with strength, technology,

and new approaches to the market often becoming instant leaders.To do this, companies need

a strategy that sustains their strong position in the race, anticipates changes, and helps them

continue to lead. The rules of the race are simple:

Competitive advantage is short-lived

Today’s competitive advantage is tomorrow’s competitive requirement

Companies without a competitive advantage should expect, at best, zero return.

Corporate level strategies answers the primary questions: What business or businesses should

we be in to maximise the long run profitability and profit growth of the organisation. How

should we enter and increase our presence in these businesses to gain a competitive

advantage. The strategies are explained below

HORIZONTAL INTEGRATION

It is the process of acquiring or merging with the industry competitors to achieve the

competitive advantage that arise from a large size and scope of operations. An acquisition

occurs when one company uses its capital resources like stock, debt or cash to purchase

another company and a merger is an agreement between equals to pool their operations and

create a new entity

E.g. IBM has undergone a large number of mergers and acquisitions during the corporate

history lasting over a century. Some of the important M&As are given in the table below

COMPANY BUSINESS VALUE

Informix Corporation Database software $1bn

PWC consulting firm Consulting and technology

services

$3.5bn

Access 360 Software $55mn

Rational Software

Corporation

Software Development $2.1bn

Daksh e services BPO services $170mn

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Viacore Supply chain optimisation $865mn

Unicorn Solutions Metadata development $365mn

MRO Software Asset management $740mn

Bid Fix Inc. Security and IT automation $190mn

Lighthouse Security

Group

Cloud Security Not disclosed

The table shows that an IT industry does not only merge with an organisation that does a

similar business, but also can integrate with an organisation that have an expertise in different

business, and that expertise is needed for the IT firm (IBM) to achieve competitive

advantage. This may be provided due to lower cost structure or increased product

differentiation

VERTICAL INTEGRATION

A company pursuing a strategy of vertical integration expands its operations either backwards

into an industry that provides inputs for the company’s products (backward vertical

integration) or forward into an industry that uses, distributes or sells the company’s products

(forward vertical integration).

E.g. IBM is a highly vertically integrated company. It integrated backward into the chip and

memory disc industry to produce the components that go into its mainframes and servers, and

integrated forward into the computer software and consulting services industries. IBM

initiated vertical integration and it is now followed by many companies like Apple, Google,

Microsoft and Intel.

STRATEGIC OUTSOURCING

Strategic outsourcing is the decision to allow one or more of the company’s value chain

activities or functions to be performed by independent specialist companies that focuses all

their skills and knowledge on just one kind of activity. When a company chooses to outsource

a value chain activity, it is choosing to focus on a fewer number of value-creation activities to

strengthen its business model.

E.g. In 2006, IBM announced it was outsourcing its purchasing function to an Indian

company to save $2bn a year, and it has steadily increased its use of outsourcing ever since.

In 2009, it announced, it would lay off 5000 IT employees in the United States and move

their jobs to India.

Similarly, American Express outsourced its entire IT functions to IBM in a seven year deal

worth $4bn

Tata Steel, Ballarpur Industries, Siemens, ABB and Whirlpool are some of IBM’s key

strategic outsourcing customers in India.

RELATED DIVERSIFICATION

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It is a corporate level strategy that is based on the goal of establishing a business unit in a

new industry that is related to a company’s existing business units by some form of

commonality or linkage between the value chain functions of the existing and new business

units.

For example, Fuhu began life as a software company, buying hardware from suppliers or

partnering with hardware vendors. However, the owners saw an opportunity to gain entry into

the children's market by manufacturing hardware. As they made further inroads into the

children's market they began offering companion low-tech offerings to protect and

personalize their hardware offerings.

Oracle, which specialises in developing and marketing computer hardware systems, ventured

to enterprise software products. They also diversified relatively into Database management

system (DMS), Enterprise Resource Planning (ERP) software, Customer Relationship

Management (CRM) software and Supply Chain Management Software (SCM)

UNRELATED DIVERSIFICATION

It is a corporate level strategy based on a multi-business model whose goal is to increase

profitability through the use of general organisational competencies to increase the

performance of all the company’s business units.

As the scope of an IT company cannot involve other businesses, unrelated diversification is

not possible in IT sector.

Business Level Strategies

There are two types of Competitive advantage firms must choose between

Low cost

Differentiation

There are two categories a firm must choose between

Broad

narrow

Combined together we can get 5 business strategies

cost leadership

Differentiation

Focused cost leadership

Focused differentiation

Integrate cost leadership/differentiation

Business level strategies adopted by information technology industry

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Cost leadership strategy:

The ability to have a cost leadership advantage requires the firm to be able to produce the

Product at a sustainable low cost that their competitors cannot achieve. Information

technology industry is an industry which is ignorant of being differentiated industry; all the

players in this industry try to cut down on the cost to achieve cost leadership and try to get

their margins to win over the competitors.

Example: Dell’s business strategy is a successful cost leadership strategy. The company's

formula for success has been based upon its unique customization, delivery, and cost

proposition. In reaction to faltering performance and the need to pursue new growth

opportunities, a dual-strategic approach is required to confront rapidly changing market

conditions. First, Dell must integrate its cost leadership skills with differentiated product

features and related services to create value for its customers and achieve the benefits of an

integrated cost leadership/differentiation strategy. Additionally, becoming a diversified IT

company opens up opportunities in related businesses, where similar products, buying

processes, target customers, or other operationally-related activities can produce synergies.

Differentiation strategy:

One strategy to win the competition is differentiation strategy. Differentiation strategy

highlights the striking difference in its brand with competitive brands. Product differentiation

may come from a variety of factors, including product quality, product features, durability,

reliability, exceptional product design, reliability, easy to fix and styles. Sustainable

differentiation advantage requires that the firm is able to provide clients with Some unique

service or product.

Example: It was at the end of the 1990s that IBM realized that remaining competitive would

require a shift to a different range of activities and services that would provide additional

value to the clients. The management team at IBM thought being just a provider of products

did not present adequate differentiation in the marketplace. Among the changes made at IBM

were decisions to refocus and expand higher value-add areas such as servers and mainframes.

Important keys to the company's current revenue performance involve decisions made to add

more software, consulting services and system integration activities. IBM's 2002 acquisition

of the consulting arm of PricewaterhouseCoopers marked an important moment in the

transition. That acquisition, although many years ago, has helped make IBM's recent results

possible. The acquisition of the consulting arm of PricewaterhouseCoopers enabled the

transition from hardware products emphasis to a services/system integration focus.

Focused Cost Leadership Strategy:

A focused cost leadership strategy requires competing based on price to target a narrow

market. A firm that follows this strategy does not necessarily charge the lowest prices in the

industry. Instead, it charges low prices relative to other firms that compete within the target

market.

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Example: Microsoft has announced two big changes in its leadership for the Middle East and

Africa (MEA) region, with a new focus on growth in underdeveloped markets and countries

such as Iraq, Lebanon, Ethiopia, and Zambia. Its main intention is to target the competitors

there and get the require market share. It has introduced the products like Microsoft office for

the low cost.

Focused differentiation:

A focused differentiation strategy requires offering unique features that fulfil the demands of

a narrow market. As with a focused low-cost strategy, narrow markets are defined in different

ways in different settings. Some firms using a focused differentiation strategy concentrate

their efforts on a particular sales channel, such as selling over the Internet only. Others target

particular demographic groups. As there is no requirement for channel or sales related work

in IT industry, so no IT firm plans to implement this strategy

Integrate cost leadership/differentiation:

It’s a hybrid strategy may become even more important--and more popular--as global

competition increases. Compared to companies relying on a single generic strategy,

companies that integrate the generic strategies may position themselves to improve their

ability to adapt quickly to environmental changes and learn new skills and technologies. This

would more effectively leverage core competencies across business units and product lines

and would also help produce products with differentiated features or characteristics that

customer’s value and provide these differentiated products at a low cost, compared to

competitors' products. This is because of the multiple, additive benefits of successfully and

simultaneously. Differentiation enables the company to charge premium prices and Cost

leadership enables the company to charge the lowest competitive price. Thus, the company is

able to achieve a competitive advantage by delivering value to customers based on both

product features and low price.

Example: Amazon’s Strategy, of offering its customers “Premium Products at Non Premium

Prices” Jeff Bezos deploys an Integrated Cost Leadership /Differentiation Strategy. Amazon

is offering kindles at low prices with product differentiation.

Functional business strategies

Functional business strategy is an area of operational management based on a specific

department or discipline within an organization, such as human resources, finance or

marketing. To say that a business has a functional level strategy for product development, for

instance, means that the company has developed a strategy for selling its goods and services

to customers. Functional business strategy is part of an organization's wider strategic plan.

Background

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Functional business strategy enables a company to deal with the nuts and bolts of its long-

term organizational plan and short-term goals and objectives. While businesses of all sizes

are interested in making a profit, smaller companies sometimes find it easier to define plans

and goals in a more meaningful way because there are less levels of hierarchy. Functional

business strategy helps smaller businesses to evaluate the effects of plans and goals specific

to the industry they operate within. Technology companies, for example, might adapt a

functional strategy for HR which seeks to hire well-qualified employees with diverse skills in

social media, programming and website design. Such an approach looks at the specific needs

of the function -- IT, HR, marketing, research and development -- and then sets objectives to

fill gaps in those functions.

Advantages

Functional business strategy is often used by small businesses to focus on and manage the

business's constituent’s parts. By developing individual goals and objectives for specific

functions in the company, business owners and managers can assign the right people and

resources to the right tasks. An employee with skills in technology, for example, can be given

work in that field as opposed to one with which she isn't familiar. The advantages of

functional business strategy therefore rely on seeing employees and resources as ends, not as

a means to achieving something else. This often means assessing the strengths and

weaknesses of the business's functions and of its resources, including employees.

Challenges

While functional business strategy is very useful in helping an organization to value its

resources, there are some disadvantages to functional strategy. For small businesses, these

downsides are even more pronounced. It is often not possible in a small business to have

separate departments for HR, finance, marketing and other business functions. Sometimes all

of these tasks are assumed by one person or by a small group of people. This makes

functional business strategy quite hard to implement because developing individual goals for

each function won't make sense in an organization where all of the departments are more or

less combined. In these cases, strategies must be fluid, adapting to the diverse skill sets and

competencies of the resources.

Product Development functional strategy

Defining the Current Market: To tell about the countries they are currently functioning

Creating New Product:

Consultancy and package implementation services in relatively growing sectors esp.

healthcare, life sciences and aviation sector, and KPO services etc can be mentioned by the

IT industries.

Result of Strategy: The end result (better the company acquired, the better the result)

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Market Development functional strategy

New Market: India, Middle-east and Australia etc., which they want to target.

Current Product: ADM, BPO, KPO, consultancy services (in BFSI, manufacturing and retail)

and software products (financial products) etc comes under this category.

Recommendation: Since these are fast developing IT market, IT industries needs a paradigm

shift in focus from US and EU markets to these markets.

Result of strategy: The end result

Operational Strategy

In response to the challenges in functional business strategy, all IT industries adopt an

operational strategy. An operational business strategy seeks to deal with all of the minutiae

that encompass the IT industry’s day-to-day routine, such as filing invoices, scheduling

employee shifts and dealing with customer complaints. Operational strategy sees resources as

a means to an end of effectively managing the business. In the small business setting,

operational strategy is attractive because it allows the particular industry to see one employee

as a resource for many different functions. Operational strategy also helps an IT industry to

identify its weaknesses in functional areas.

Merging Strategies

While the downsides of functional strategy are pronounced and evident in many small

businesses which can’t be a problem for the huge IT industries, operational strategy also has

its shortcomings. These include the tendency to view employees as just a pawn in the larger

organizational planning process. Knowledgeable business owners and managers are therefore

able to combine elements from both functional and operational business strategy to help plan

for the business's longevity. Seeing employees as the company's most valuable resource helps

to focus on them as ends in themselves while still being able to view other business tools like

technology and money as means to achieving the overall goals of the business.

HUMAN RESOURCE STRATEGIES

Employee productivity is one of the key determinants of an enterprise’s efficiency, cost

structure and profitability. Productive manufacturing employees can lower COGS as a

percentage of revenues. The challenge for a company’s HR is to device ways to increase

employee productivity. Companies have specialized hiring strategy or employee training to

achieve the result. Some examples are mentioned Infosys Technologies, a leading software

company based in India, was voted the best employer in the country in many HR surveys in

the recent years. The company was well known for its employee friendly HR practices.

Infosys attracted the best talent from across the world, and recruited candidates by conducting

one of the toughest selection process. All the selected candidates were required to go through

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an intensive 14 week training program. All the employees were required to undergo training

every year, and some of the chosen employees were trained at the Infosys Leadership

Institute to take on higher responsibilities in the company.TCS provides HR services in 3

models.

Integrated hosted technology and services on a process as a process service

model

Customer preferred environment followed by transactional services

Transacted services on customer-owned technology environments

TCS’ HR Services are backed by industry experience, HR expertise and global coverage TCS

provide comprehensive traditional and IT-enabled multi-process services that are specifically

designed to allow you to concentrate on your core business activities.

IBM When employees were asked to rank the most significant external pressures on their

organization, more than 340 chief human resources officers interviewed worldwide1 cited

technology factors and people skills among their top concerns.

External factors, including an overall increased urgency for focus on the customer, are

dramatically shifting the way business is done from the outside. IBM has following solutions

to the existing problems in the form of

Global capabilities

HR outsourcing

HR services for cloud application

Talent management

Employment branding

HR Analytics

CONCLUSION

Service sector is showing a tremendous growth in India, with IT sector contributing a major

chunk of it. With the large pool of knowledgeable workers, state of the art technologies and

outsourcing, the sector is expected to show a rapid growth. All the players in the industry act

as threats to one another and every one of them wants to achieve competitive advantage. So,

strategy formulation and implementation is quintessential.

From the corporate level strategy point of view, horizontal integration and vertical integration

seems to be the best strategies that the companies are following and are willing to follow.

They have achieved success by adhering to the same. IBM is a good example of this. It

initiated vertical integration, followed by Apple, Microsoft, etc.

Coming to the business level strategies, Integrated cost leadership / differentiation helps them

gain a competitive advantage over its peers. This is because they offer differentiated

customised services at low cost. Functional Level strategies are equally important and must

be in line with the corporate strategies. This, in turn must be in line with the vision, mission,

goals and values of the company. The strategies help improve the company’s ability to attain

superior efficiency, quality, innovation and customer responsiveness. Efficient managers at

each of the levels are the need of the hour, which actually helps a company to have an

advantage over their peers. So, in order to reach the goals, we should formulate all 3

strategies in line with the company’s mission and need a manager at all these levels that help

the company attain superior profitability and competitive advantage