Strategy in the IT industry

Introduction

Information technology has emerged as the most powerful toolfor all round development of the world today and has been recognized as a driving force for the next century. Indian IT is booming and emerging steadily on top of the global information technology market. The IT industry in India is already a major drive of the Indian economy. IT will make remarkable changes in social, cultural, scientific, technological and economic fields in the 21st century. Information Technology has become an integral part of our life and no section of society can afford to ignore its impact and advantages. The importance of IT has grown manifold in the new competitive and global scenario of the world and it has to discover new horizons of its applications affecting everyone's life in times to come The Information Technology (IT) sector in India holds the distinction of advancing the country into the new-age economy. The growth momentum attained by the overall economy since the late 1990s to a great extent can be owed to the IT sector, well supported by a liberalized policy regime with reduction in telecommunication cost and import duties on hardware and software. Perceptible is the transformation since liberalization – India today is the world leader in information technology and business outsourcing. Indian IT companies have globally established their superiority in terms of cost advantage, availability of skilled manpower and the quality of services. They have been enhancing their global service delivery capabilities through a combination of organic and inorganic growth initiatives. Global giants like Microsoft, SAP, Oracle, and Lenovo have already established their captive centers in India. These companies recognize the advantage India offers and the fact that it is among the fastest growing IT markets in the Asia-Pacific region.

Over the past decade, the Information Technology (IT) industry has become one of the fastest growing industries in India, propelled by exports (the industry accounted for more than a quarter of India's services exports in 2004-05). The key segments that have contributed significantly (96 percent of total) to the industry's exports include – Software and services (IT services) and IT-enabled services (ITES) i.e. business services. Over a period of time, India has established itself as a preferred global sourcing base in these segments and they are expected to continue to fuel growth in the future.

The last 20 years have been the most significant period for Indian economy. During this period the nation has identified its economic destiny with great clarity. The most precious achievements of this period were the development of Information Technology. Indian Software industry has made significant contributions to the world of IT by gifting some of the leaders of the industry from Indian soil. The industry has been performing at a staggering rate of growth of about 50 per cent every year and has sustained global competition.

Industry structure

STRUCTURE OF THE IT INDUSTRY

The IT industry has emerged as one of the most important industries in the Indian economy contributing significantly to the growth of the economy. The IT industry of India got a major boost from the liberalization of the Indian economy. India's software exports have grown at an annual average rate of more than 50% since 1991. The structure of the IT industry is quite different from other industries in the Indian economy. The IT industry of India is hugely dependant on skilled manpower. Primarily a knowledge based industry, the IT industry of India has reordered significant success due to the huge availability of skilled personnel in India.

The industry structure in the IT sector has four major categories. These are -

* IT services

* IT enabled services

* Software products

* Hardware

IT SERVICES

IT services constitute a major part of the IT industry of India. IT services include client, server and web based services. Opportunities in the IT services sector exist in the areas of consulting services, management services, internet services and application maintenance. The major users of IT services are -

* Government

* Banking

* Financial services

* Retail and distribution

* Manufacturing

IT ENABLED SERVICES

The services which make extensive use of information and telecommunication technologies are categorized as IT enabled services. The IT enabled services is the most important contributor to the growth of the IT industry of India. Some of the important services covered by the ITES sector in India are –

* Customer-interaction services including call-centers

* Back-office services

* Revenue accounting

* Data entry and data conversion

* HR services

* Transcription and translation services

* Content development and animation

* Remote education,

* Data search

* GIS

* Market research

* Network consultancy

SOFTWARE PRODUCTS

Software products are among the most highly exported products from India. The software industry in India originated in the 1970s and grew at a significant pace in the last ten years. Between 1996-1997 and 2002-2003, the Indian software industry grew more than five times from 2630 crores to 13200 crores. During the same period software and service exports from India grew by almost twelve times.

HARDWARE

The hardware sector of the It industry focuses on the manufacturing and assembling of computer hardware. The consumption of computer hardware is high in the domestic market. Due to the rise in the number of IT companies, sales of desktops, laptops, servers, routers, etc have been on the rise in recent years. Many domestic and multi-national; companies have invested in the computer hardware market in India. Another categorization in the structure of India's IT industry is related to the market. There are two major market classifications - the domestic market and the export market. The export market, dominates the IT industry accounting for 75% of the revenue.

Industry Landscape

India's technological landscape has changed significantly. Since the late 1990s, many IT and IT enabled services (ITES) players have emerged from India in the global arena and the country is being recognized as a player to reckon with in the international markets. India has also emerged as a hub of talent, with a vast scientific and managerial talent pool that is available at significantly lower costs than at onshore locations in the US and Western Europe. The biotech, telecoms and broadband sectors have witnessed double digit growth in the last few years and this trend is expected to continue in the future. India has an exhaustive legal framework governing all aspects of business. The regulatory regime in India has comprehensive laws that have been amended from time to time, which has benefited business entities, although the implementation of the regulations continues to be a major issue. India is endowed with rich biodiversity and a comprehensive regulatory framework and institutions for the protection of the environment but implementation remains tardy.

PESTLE Analysis

Political

The political structure of India is stable as it is demographic country. However, there is a panic of hung parliament which there is no clear majority. It has a strong demographic system. The policies are macroeconomic since both the major parties have the similar economic policies. These policies are in support of liberalization. US government announced that the companies in US outsourcing the IT work to rest of the world apart from US will not be considered for tax benefit. India is facing a threat of Terrorism from Kashmir. Its fighting on terrorism from couple of decades ago.

Economic

India has a strong GDP growth due to strong performance on service sectors. It also has increase in demand of domestic IT. The attrition rate is low due to recession. However due to cost advantage the industry is economically attractive. India has got the largest working age population who provide significant and sustained impetus to economic growth. Currency fluctuation is one of the factors.

Social

Language spoken is not an issue since English is widely spoken language in India. English is considered the primary medium of education. India has vast technical institutes and university across the country which offers IT education. It has a weak social security system. Health insurance is not mandatory for every individual. The Employee Provident fund and Employee pension scheme is applicable to only to organized sector.

Technological

Due to IT revolution, the internet has become backbone. All the Indian cities are connected with optical cables. New low cost technologies are creating opportunities and challenges in IT industry. Telephones are growing since India has got the world's lowest call rates and new services are introduces such as 3G, Wi- max. Graduates are not having any practical knowledge before job. The education system is focused on theoretical aspect with little or no practical training. So they require a practical training before job. India has got the research talent at lower cost compared to developed countries.

Legal

Indian IT companies can have special economic zones (SEZ) with a minimum of 10 hectares and get a tax benefit. Employees are supposed to work by signing a bond which is not legal. Indian government made legal for to companies operating related to security of data transmission and storage.

Environmental

Indian IT companies are concentrating on the environment issues. They are aiming to reduce the carbon footprints, water consumption, usage of paper and energy usage. India has low

PORTER's five forces

Every industry has competitors. Software industry in India has ‘Perfect Competition' where there are many firms in the industry .The industry has no barriers to entry and exit. Almost all the firms provides or offers homogeneous services. (Michael,1980) stated that the state of the competition depends on five competitive forces which are shown in 1. Three forces are horizontal competition

Rivalry among existing firms

Strong competition exists among firms. Large numbers of players are available in this industry and are almost equal in size and power. All firms compete for the same customers and resources. There is little or no differentiation among the services offered or provided. The industry growth is high and currently it is in growing stage. The exit strategies are low. There is low switching cost. So the competitive rivalry is high. Each firm has its own advantage. For instance Microsoft has major market share in operating systems. Oracle is market leader for The major competitors would be Tata concultancy services,Infosys Technologies LTD,Wipro and so on. They have the major market share in the industry.

Bargaining Power of Buyers

Software industry has two types of buyers: Individual or small consumers and Institutional buyers such as big or small enterprises where they outsource the work or execute a new IT solution. Business to business buyers like Banking,FinancialServices andInsurance(BSFI), telecom, manufacturing, retail and health care. Buyers have large number of options since there are huge numbers of competitors.

Bargaining Power of Suppliers moderate

The suppliers for Software industry were Hardware suppliers, software package suppliers such as Microsoft, sun etc. and canteen services. There are more suppliers, so the companies have lot of options to choose. So the bargaining power of suppliers is moderate.

Threat of substitutes

India is developing country. It has advantage of low cost of labour, huge number of highly skilled labour and large English speaking population. However Countries like Vietnam, Philippines, Malaysia, China and Central and Eastern European countries offer IT-BPO services at low prices, and it is probable that India may lose its low cost advantage. Such countries are progressively promoting IT-BPO business by offering various incentives and tax benefits(MIT,2009). Information Technology- Information Technology Enabled Services (IT-ITES) companies are already very well established. However Indian software companies need to be more innovative to compete. This has an advantage in long term.

Threat of new entrants

There is low initial cost to start up a new IT company. Apart from that government is also encouraging entrepreneurs by providing tax benefits. There are many financers to invest in a new venture. There is lot of scope for small firms to enter. Top Companies are ramping up the major employee's strength and resource capacity. Low barriers to entry for new entrants.In the IT industry firms can enter really easily and at the same time they can leave the industry easily also. So the threat of new entrants is high in Indian IT industry. But most of the market has been captured by major players like TCS, Infosys, Wipro, HCL etc. So if we look at the trends we can say that the threat to these players with new entrants is not very significant.

Industry Dynamics

The major players in the industry are Tata Consultancy Services, Infosys Technologies LTD, Wipro Technologies, Tech Mahindra and HCL Technologies. The major revenue is generated from these firms.

Indian IT industry is fastest growing

BPO is the fastest growing segment within the Indian IT-BPO sector with a five year CAGR of 29 per cent over the past five years.(MIT 2009). BPO exports from India grew from US $ 3.1 billion in 2003-04 to over US $ 10.9 billion

in 2007-08. Over the same period, direct employment grew from 216,000 in 2003-04 to 700,000 in 2007-08. Despite he economic slowdown, this segment is estimated to grow at 17.4 per cent, and reach export revenues of US $ 12.8 billion in 2008-09, employing over 790,000 professionals. Banking, Financial Services and Insurance (BFSI), High Technology and Telecom continued to account for more than 60% of the Indian IT-BPO exports. Healthcare industry is likely to witness increased IT investments due to increased focus on public health, making healthcare and insurance affordable to all. Other industries that will see growth include telecom, retail and utilities, etc.

While US & UK remained the largest export markets (accounting for about 60 per cent and 19 percent respectively, in 2007-08), the industry is steadily increasing its exposure to other geographies. Exports to Continental Europe in particular have witnessed steady growth. Over 600 Multinational companies are known to be sourcing product development and engineering services from their centres in India. The growing nature of responsibilities and ownership assumed by these India–based resources are helping India evolve into a strategic hub for R & D.

Market

FY05

FY06

FY07

FY08

America

68.30%

67.18%

61.40%

60%

Europe (Incl. UK)

23.10%

25.13%

30.10%

31%

Rest of the World (Inc. APAC)

8.60%

7.69%

8.50%

9%

Source: NASSCOM(2009)

FY2005

FY2006

FY2007

FY2008

FY2009

IT Exp. &

390,000

513,000

690,000

860,000

946,809

Services

Exports

BPO

316,000

415,000

553,000

700,000

789,806

Exports

Domestic

352,000

365,000

378,000

450,000

500,000

Market

Total

1,058,000

1,293,000,

1,621,000

2,010,000

2,236,614

Industry Attractiveness

ROCE

Table 1:

There is a rapid growth in revenue from 2005 to 2009.Table shows the detail revenue from 2005 to 2009.Majority of the revenue is from IT services followed by BPO and Engineering services and Rand D, software products.

Table 2:

USD billion

FY2005

FY2006

FY2007

FY2008

FY2009E

IT Services

13.5

17.8

23.3

31.0

35.2

-Exports

10.0

13.3

17.8

23.1

26.9

-Domestic

3.5

4.5

5.5

7.9

8.3

BPO

5.2

7.2

9.5

12.5

14.8

-Exports

4.6

6.3

8.4

10.9

12.8

-Domestic

0.6

0.9

1.1

1.6

1.9

Engineering Services and R&D, Software Products

3.8

5.3

6.5

8.6

9.5

-Exports

3.1

4.0

4.9

6.4

7.3

-Domestic

0.7

1.3

1.6

2.2

2.3

Total Software and Services Revenues Of which, exports are

22.5 17.7

30.3 23.6

39.3 31.1

52.0 40.4

59.6 47.0

Source: NASSCOM (2009)

Source: NASSCOM(2009)

The IT- BPO industry has grown rapidly and became the factor for growing economy. It is sustainably contributing the rise of GDP, employment and exports. It has contributed to increase in the economic development. The growth is due to the India's sustained leadership over other competing offshore sourcing destinations is determined by well built fundamentals includes a large number of high qualified pool, English speaking people and adhering to global quality standards which includes emphasis on data security and a highly strong support from government which focuses on the development of infrastructure and introducing new policies that support the growth of industry (MIT,2004). Indian IT - ITES growth has had a significant multiplier effect on the Indian economy. Apart from the direct impact on national income and employment, the sector has also contributed to the growth of several ancillary industries, a rise in direct-tax collection and an increase in consumer spend due to the significantly higher disposable incomes. The rapid growth of ITES-BPO and the IT industry as a whole has made a deep impact on the socioeconomic dynamics of the country. The sector has risen to become biggest employment generator with the number of jobs added almost doubling each year, has spawned a number of ancillary businesses such as transportation, real estate and catering, and has contributed to a rising class of young consumers with high disposable incomes.

Segments

Indian IT industry can be divided in to two markets: Domestic market and Export market. Major revenue is generatd from the export markets.

Exports by geography: While the US and the UK remain the largest export markets (accounting for about 61 per cent and 18 per cent respectively, in FY2007), the industry footprint is steadily expanding to other geographies. Exports to Continental Europe in particular have witnessed notable gains, growing at a CAGR of more than 55 per cent over FY2004-2007.

Though the IT-BPO sector is export driven, the domestic market is also signifi cant. The revenue from the domestic IT market (excluding hardware) is expected to grow to about US $ 12.5 billion in the year 2008-09 as compared to US $ 11.7 billion in 2007-08 an anticipated growth of about 6.8 per cent in dollar terms. BPO demand in the domestic market has witnessed noticeable growth over the past few years. It is expected to reach US $ 1.9 billion in 2008-09 as compared to US $ 1.6 billion in 2007-08.

ANSOFF MATRIX

It is a marketing tool used by the firma to consider the possible ways to grow their business with existing or new services and existing or new markets.

STRENGTHS

Cost advantage:

Human resource - India has one of the largest pools of technically qualified people with low wages. A large proportion of Indian graduates are proficient in English, ideally suited to the growth of ITES industry.
Wide range of service offering: Providing an end to end solutions including services like consultancy, BPO and KPO.
Government support - Quality telecom infrastructure has been put in place over past few years. Intellectual Property Right laws have been implemented to improve compliance with intellectual property rights

Many global players have set-up operations in India like Microsoft, Oracle, Adobe, etc. This effect of globalization has always been an advantage for the whole industry growth over the years.

The IT industry follows all the Quality Standards such as ISO 9000, SEI CMM etc. properly. That is also followed as a part of the standards that all companies follow in India. Due to the immense competition companies always strive to gain as many as quality standards possible for better recognition.

Indian time zone (24 x 7 services to the global customers). Time difference between India and America is approximately 12 hours, which is beneficial for outsourcing of work.

WEAKNESS

High dependence on USA: Most of the US companies are slashing their IT budget due to economic slowdown. This affects the revenue of Indian firms.

Attrition Rate:

Although slowdown in global economy has lowered attrition rate but the industry still faces high attrition rates as compared to other sectors

Brand India - India's brand equity in the global market is poor although beginning to improve. Cultural misalignment between India and Western countries still poses problems in large integrated projects.

OPPORTUNITIES

Increased off-shoring -There is a heavy downward pressure on IT budgets resulting in increase in off-shoring by companies. Business Process Outsourcing, and particularly, off-shoring is increasing in order to reduce process costs. Big MNCs (multi-national corporations) such as Accenture, CGEY, CSC are also establishing offshore development centers in India.

Under-penetrated geographies and verticals - Under-penetrated regions such as Canada, Germany, France, Japan, and Korea are big potential markets. Under penetrated verticals –utilities, telecom services, retail & healthcare present potentially huge opportunities

Increasing no of working age people – Due to the changes in the society and the laws of the land, people have started working beyond the expected age.

High quality IT education department is also one opportunity that India has an advantage in. The educational system is modeled to nurture analytical and scientific talent. Besides that education is much more affordable in India as compared to the western nations.

THREATS

Competition: Philippines, Malaysia, South Africa

Lack of Data security systems

Increasing public opposition to off-shoring in higher-wage countries - Legislation against off-shoring by governments in client markets, to save jobs for local population, may result in reduced off-shoring to India. Labor union pressures on companies (in the developed countries) may compel companies against outsourcing. The Indian ITES/BPO companies are striving hard to ensure the security of data and privacy protection. They are following the stringent security controls specified by their customers through contracts.

Reducing margins - With increasing competition, margins are reducing for Indian IT firms as they try to retain business

7s Framework

It is used

Staff:

Software industry is “Knowledge based industry”. A firm needs to have the quality and adequate staff. They need to recruit maximum employees of engineering background. Recruiting the entry level canditated who have good academic record,high technical skills and high level of learning ability. They need to provide training of relevant technologies and soft skills to their resources.

Structure:

The firm should have the multidivisional structure where the authority would be Chief Executive Officer(CEO). The second level would be the directors of different strategic Business Units(SBU) based on the geographic locations. Such as US, UK, APAC and so on.Further each SBU has different departments such as IT, HR, Finance. Further each department has di

* Systems:

A firm should have various systems such as HR, financial, operational, IT. Each

* Shared Values:

This is very crucial to the firm as these are core values. Values are part of arganisation culture. Each and every employee needs to follow these common values. The company should have an objectives and goals and all the resources hould contribute to achieve the goals. Some of the values might be Customer focused,

* Style:

A firm should have a dynamic Leader. Leadership is based on the long term business vision and supportive styles.hey need to focus on developing leadership among employees. The employees and managers should have the good relationship between them. Intern leads to high productivity of work. Manager should be task oriented as well as employee oriented. He need to be efficient in getting work done with employee satisfaction. Top management team has to focus on the sharing the information about the company and continuously getting the feedback and inputs from resources in decision making and build good relationship with employees.

* Skills:

A firm should have the resources with latest cutting edge technologies to compete. The employees must be aware of the latest technologies. They should mainly focus on the quality of the service. The skills needs to be monitored and assessed ever year.

* Strategy:the plan devised to maintain and build competitive advantage over the competition.

Additionally, firms need to focus on increasing their levels of customer intimacy, as well as developing the brand value of their organizations through product and service differentiation.

A firm can achieve high rate of profits by among competitors in two ways, by either it can supply an identical service at a lower cost or it can supply a service that can be differentiated from the competitors in such a way that the customers are willing to pay a premium price that exceeds the additional cost of the differentiation. In the earlier case the firm is cost advantage in the later case the firm is differential advantage.

The new entrant needs to concentrate on the differentiation strategy where there is unique service offering among the competitors. Majorly the focus might be on the quality of the service delivered rather than cost. The quality in terms of the IT services delivery, low maintenance software. This provides padding against competitive rivalry because

http://www.mit.gov.in/download/annualreport2004-05.pdf

http://www.mit.gov.in/download/annualreport2005-06.pdf

http://www.mit.gov.in/download/annualreport2006-07.pdf

http://www.mit.gov.in/download/annualreport2007-08.pdf

http://www.mit.gov.in/download/annualreport2008-09.pdf


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