IT

61Indian Software Success Story:

A Resource-Based View of Competitive Advantages

India has achieved remarkable success in the software industry. Software

accounts for 25 percent of the total Indian export. The purpose of this paper

is to discuss the resources, including technical skills and cost competency, that

have contributed to the competitive position of the Indian software industry.

In accordance with the Resource-Based View (RBV), the main source of the

market performances of a range of firms lies on the specific nature of their

resources and their accumulated competences. This paper discusses the Indian

software industry and its resources and analyzes the case using the RBV of

strategy. The paper discusses the Indian software industry's growth drivers

in terms of resources. It also underlines emerging challenges for the Indian

Software Industry and proposes the Dynamic Resource-Based Model.

Pankaj M Madhani*

Indian Software Success Story:

A Resource-Based View

of Competitive Advantages

Introduction

The purpose of this paper is to discuss the resources, including technical skills

and cost competency, that have contributed to the competitive position of the

Indian software industry. Here, a detailed discussion of the Indian software

industry and its resources is presented and the case analyzed, using a

Resource-Based View (RBV) of the competitive advantages. In accordance with

the RBV, the main source of the market performance of a range of firms lies on

the specific nature of their resources and their accumulated competences. A firm

with a competitive advantage excels in time, quality, or cost, or a combination

of such, over its competitors. A combination of resources, including supportive

government policies, skilled workforce, sound infrastructure, global linkages and

first mover advantage, etc., helps to create a sustainable advantage for the

Indian software industry. RBV helps to explain the contribution of various

resources to the Indian software industry. The paper begins with a case study

of the Indian software industry, followed by an analysis of the case using the

RBV of strategy.

Literature Review

Over the last few years, RBV has gained much influence in strategy. This approach

results from several research streams, notably economic theory and strategic

* Assistant Professor, The Icfai Business School, Ahmedabad, India.

E-mail: [email protected]

© 2008 The Icfai University Press. All Rights Reserved.

The Icfaian Journal of Management Research, Vol. VII, No. 8, 200862

management. Its roots go back to the 1950s, with the work of Penrose in 1959.

Edith Penrose (1959) provided initial insights into the resource perspective of the

firm and contributed with the formulation of important concepts, such as:

a firm can be seen as a collection of resources; the path of growth of a certain

firm can be optimized, requiring the combination of internal as well as external

resources in a particular sequence; and the process of growth of a firm is

dependent on management, its acquired experience and its learning capability

(Rugman and Verbeke, 2002). Many researchers have contributed to its

development. The author believes that RBV helps explain and deduce the

contribution of various resources to the Indian software industry. This analysis

of competitive advantage is based on the unique resources that a firm possesses.

To the extent that a competitor cannot create or substitute for these resources,

they provide a unique advantage to the firm that owns them. Yet, resource

advantage may not be sufficient—the firm needs to possess distinctive capabilities

to make better use of its resources (Penrose, 1959).

However, RBV was put forward by Wernerfelt (1984) and subsequently

popularized by Barney (1991). Resource-based thinking considers that a

company’s resources include all assets, organizational characteristics, processes,

aptitudes, information and knowledge controlled by that company and its

employees (Barney, 1991). The RBV of the firm (Barney, 1991; Mahoney and

Pandian, 1992; and Amit and Schoemaker, 1993) states that internal resources

and capabilities of a firm are the basis for creating sustainable competitive

advantage. This is achieved by the accumulation and use of resources and

capabilities that build unique, inimitable and non-substitutable competencies.

According to the RBV, competitive advantages are achieved through the

ownership of scarce and valuable resources, which are fundamental determinant

of competitive advantages. A resource is valuable when its use helps in exploiting

specific opportunities. A firm’s competencies stem from its ability to reconfigure

and exploit its assets in such a way that it attains a competitive advantage. These

competencies derive from practical and theoretical knowledge acquired through

experience and formal learning. In the RBV approach, resources are distributed

in a heterogeneous way among the nations, within certain industries, as a result

of different paths (path dependency) followed by firms and their governments.

Since some resources are difficult to acquire or substitute, there is potential for

the establishment of competitive advantages that create a superior and

sustainable financial and market performance, until rival companies across the

border obtain a set of equivalent resources (Barney, 1991). In the RBV, resources

and competences are assets, capabilities, organizational processes, attributes,

information, knowledge, etc., controlled by the firm, that may lead to the

improvement of its efficiency and effectiveness (Barney, 1991).

These resources and competences can be used to create and implement

strategies. To have the potential that makes possible a sustainable competitive

advantage, a resource should possess the following attributes: it needs to be

valuable, in the sense that it can allow the company to take advantage of

opportunities and to neutralize present threats in the competitive arena; it needs



to be rare among the current and potential rivals; it should not be perfectly

imitable, i.e., it should be non-perfectly imitable; and it cannot have strategically

equivalent substitutes that are valuable, but are not rare or imitable

(Barney, 1991). Non-perfectly imitable resources can be originated by any

combination of the three reasons: (1) the ability of the firm to obtain the resource

is dependent on unique historical conditions of its development (path

dependency); (2) the connection between the possessed resources and the

sustainable competitive advantage has an ambiguous causality; and (3) the

generating resource of the sustainable competitive advantage is socially complex

(Barney, 1991).

Pettigrew and Whipp (1993) argue that the competitive performance does not

depend just on the characteristics of the firm or the utilized technology, but also

on a combination of a set of abilities and modes of action. Usually, the success

of companies has been attributed to the capability of creating competitive

advantages that allow them to distinguish themselves from their rivals, to

generate superior positive economic rents, and to sustain those differentials in

a long lasting way (Pfeffer, 1994). Jarvenpaa and Leidner (1998) have used this

theory to analyze the case of a firm in Mexico, a developing country. Entering

the 1990s, the highly dynamic business environment challenged the original

propositions of the RBV as being static and neglecting the influence of market

dynamism (Eisenhardt and Martin 2000; and Priem and Butler 2001).

Many authors (Eisenhardt and Martin, 2000; Priem and Butler, 2001; Zahra and

George, 2002; Zollo and Winter, 2002; and Winter, 2003) have made significant

contribution to its conceptual development. The essence of the RBV lies in the

emphasis on resources and capabilities as the genesis of competitive advantage.

Wade and Hulland (2004) have reviewed the RBV and information systems

research.

The Indian Software Industry at a Glance

From being a mere $2 bn industry in 1994-95, the Indian IT and ITES industry

has grown phenomenally over the years. It recorded a 30.7 percent growth last

year (2006-07), clocking in revenues of $39.6 bn. In 1996, it accounted for a mere

5 percent of the total Indian export, but today it has jumped to 25 percent. Indian

IT and ITES sector is confident of achieving the US$ 80 bn in annual revenue by

2010, from the expected value of $50 bn in 2007-08. It would add 7 percent to

India’s GDP by 2010, from the present level of 5.4 percent. The growth of the

Indian software industry has been a phenomenal success when measured

against standard indicators, such as growth in sales, employment and exports,

and especially when contrasted with the performance of other industrial sectors

in India. By 2008, India’s software industry will employ four million people and

account for 8 percent of the GDP and 30 percent of the total foreign exchange

earnings. The particular strength of Indian firms was their ability to assemble

teams of talented engineers and programmers and deliver a technical and

cost-efficient outsourced service to diverse customers anywhere in the world.


They also leveraged their capabilities for maximum economic value through the

adaptation and perfection of a new business model. Figure 1 highlights the

growth of the Indian software industry.

As of December 2006, over 400 Indian companies have acquired quality

certifications, with 82 companies certified at SEI CMM Level 5—higher than any

other country in the world. The NASSCOM-CRISIL report titled “The Rising

Tide— Output and Employment Linkages of IT-ITES” says that every rupee spent

by the IT-ITES sector (on domestically-sourced goods and services) translates to

a total output of Rs. 2 in the economy. And for every job that is created in this

sector, four jobs are created in the rest of the economy. According to the study,

exports by the IT-ITES industry would cross $31 bn in the current calendar year

and top $60 bn in 2010, by which time the jobs created by the industry would

jump from around 8 million to around 11.5 million.

An interesting aspect of the history of outsourcing is that the factors that were

crucial to the emergence of outsourced software exports from India were quite

distinct from the factors that sustained the competitive edge of Indian software

firms, and hence the growth of the industry overtime. For example, while

abundant (and cheap) human capital was the basis of India’s early software

exports, the growth in software exports was based on improved productivity of

the industry. Here it may be argued that this improved productivity was due to

the development by the Indian firms of dynamic capabilities, which enabled them

to use changing economic opportunities to carve out a niche in the export of

outsourced services. The main advantage enjoyed by the Indian software firms

initially was the cost advantage of cheap engineering talent. But, gradually, the

leading Indian firms possessed unique capabilities in outsourcing, across a range

of services, to large multinational clients.

Figure 1: Growth of Indian Software Industry

Source: NASSCOM.

The Growth of Software Revenues in India, 1993-2007

40.00

30.00

20.00

10.00

0

Software

Revenue

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0.33 0.49 0.73 1.09 1.76 2.60 3.96 6.22 7.65 9.88 12.90 17.70 23.60 31.30

0.56 0.84 1.22 1.76 2.94 4.01 5.54 8.30 9.96 12.46 16.70 22.60 30.30 39.70

Exports

Total

Exports Total

$ Bns

Year



Several important features of India’s software growth are discernible here.

First, export sales have been crucial to the rise in industry revenues. More than

two-thirds of the software industry’s sales were due to export sales. The basic

value proposition and capability that prevailed was the ability to deliver a working

team of software professionals, capable of undertaking any software engineering

job, to any part of the world. Designed to overcome infrastructural constraints

imposed by poor access to telecommunications, exporters could register with their

regional STP (Software Technology Park) for satellite links and operate via the

web, for a fraction of what it would have cost them to have their own dedicated

lines. This dramatically decreased the cost of telecommunication access and

increased its coverage, so that offshore operations came within the reach even

of smaller firms.

The large-scale outsourced business model demands certain complementary

organizational capabilities: the ability to scale up quickly in response to growth

in demand; the human resource management capability; the software process

management capabilities (to ensure fewer errors and greater reliability of the

service product); and lastly, given that customers are largely overseas, the ability

to manage global operations. Indeed, the offshore business model would not

have succeeded without these parallel organizational capabilities. Indian firms

have been operating mostly at the lower end of the software value ladder—at

the programming/maintenance services.

History of Outsourcing

Basically, an organization can get its information systems from two sources—

internally, from its own IT department, or externally, through outsourcing (McFarlan

and Nolan, 1995; and Aubert et al., 1996). In-house provision is often seen as the

best way to provide an organization with IT services that are well adapted to

support its business activities, while preserving its trademark processes and

know-how (Chesbrough and Teece, 1996). On the other hand, in-house provision

has also been described as excessively expensive, anachronistic and inefficient

(Huber, 1993; and Fields, 1995). Internal IT projects are notorious for being long,

late and over budget (The Standish Group, 1995; Rockart et al., 1996; and Keil et

al., 1998). Moreover, they are also said to distract a company from its core business

by draining scarce resources to accomplish an allegedly marginal activity.

As reported by Earl (1996), critics of in-house development argue that a better

solution is to outsource those IT activities to specialists, thus permitting the

company to focus on its core business. The presumption underlining this argument

is that specialists are better equipped to take advantage of economies of scale,

while offering access to the best IT development practices. The resultant savings

should eventually translate to more cost-effective IT services for the firm

(Gupta and Gupta, 1992; Fields, 1995; and Elmuti et al., 1998). Since the early

1990s, the outsourcing approach has gained both in popularity and in importance

to the point that in some companies, the entire IT function has been outsourced

(Loh and Venkatraman, 1992; and Grover et al., 1994).


RBV of the IT Outsourcings Model

Outsourcing can be described as the contracting out of the company’s major

functions and activities to an external service or goods provider. From an RBV,

the less the necessary resources are present within the firm, the more the firm

will seek to overcome this weakness by calling upon external expertise.

Conversely, the more the necessary resources are present, the more the firm will

seek to boost and exploit this expertise to gain a competitive advantage

(Prahalad and Hamel, 1990). On the other hand, the lower the strategic value

of these resources, the more the company is justified in parting with them and

in relying on outsourcing. Keeping assets with a low strategic value would

monopolize resources that could be put to better use elsewhere. Consequently,

interactions between these two factors—‘Strategic Value’ and ‘Presence of

Appropriate Resources’—should have a foreseeable impact on the sourcing mode.

These potential effects are represented in Figure 2.

When to Outsource

In the scenario where the ‘Strategic Value’ is low and the ‘Presence of Appropriate

Resources’ is also low, the sensible choice would be to outsource the future

development of the IT system and services to a supplier. Under these

circumstances, there would be no rationale to invest time and scarce resources

to acquire competencies that would only be used in a non-core project. Typically,

the company would hire an IT expert/consultant to develop its information system.

In its most extreme form, a company can outsource its whole information system

development function.

Figure 2: The IT Outsourcings Model

X = Preferred Block of

Outsourching

Presence of Appropriate ResourcesL H

Str

ate

gic

V

alu

eL

H

X



Literature Review on Success Factorsfor Software Exporting Nations

Researchers and policy makers have had a long fascination with the question as

to why a certain national industry succeeds: what led to success, what factors

will keep it successful, and what prescriptive factors can be gleaned for other

nations (as surveyed in Porter, 1990). Traditionally, economists have explained

an industry’s success in macroeconomic terms, interest rates, exchanges rates,

cheap labor, abundant natural resources, government policy, and intervention in

the marketplace, or by national advantages in management practices and

labor-management relations. An important milestone in this regard was Michael

Porter’s (1990) model of competitive advantage of nations that posits four critical

factors for a national industry not only to be able to export, but also to achieve

global leadership over an extended time period.

Still more recent is the focus on success models for nations’ software exports.

A World Bank report (Garry, 1999) categorized important new software nations

according to four criteria (with the respective nations in parentheses): cost

(China); English-speaking ability (Singapore, Ireland); ease of doing business

(Ireland, Israel, India, Singapore); and segment expertise (India). Perhaps, the

most comprehensive model, to this point, for evaluating national software export

industries, is the Software Export Success Model proposed by Heeks and

Nicholson (2002). This model has already been applied to a number of new

software exporting nations (Bruell, 2003; Gengler, 2003; and Nicholson and

Sahay, 2003).

RBV of the Indian Software Industry

The ‘Resource Based Model’ is used here as a base to incorporate success factors

that lead Indian software industries to remarkable success. With the remarkable

success of India’s software industry, policymakers and industry leaders in scores

of developing nations are attempting to model their own software exporting

industries. The eight major factors that lead to Indian software export success

are synthesized and summarized here. This synthesis is captured into an RBV

Model. The model is useful in order to look back and explain the success of the

Indian software industry. The model is also useful as a framework for prescriptive

policies and strategies to be taken by other nations in order to improve their

position in this arena.

The eight factors identified are:

1. Human capital, including quantity, composition, language skills,

managerial and technical skills;

2. Wages/Cost advantages;

3. Government policy, support and vision;


4. Strong quality focus;

5. Industry characteristics, including clustering effects, the number of firms,

their size, the associations or body which represents the industry’s firms,

the industry’s degree of common vision and branding, and the standards

that the firms aspire for;

6. Capital;

7. Project/Technological infrastructure; and

8. Linkages, including linguistic linkages, diaspora linkages and time-zone

linkages.

Human Capital

The software sector’s human capital encompasses the collective characteristics

and abilities of its software professionals: quantity, composition, language skills,

and managerial skills. Each of these is discussed here in turn.

Quantity

The strength of a nation’s human capital stems from a multi-generational tradition

of science and engineering that has its roots in strong universities, polytechnics,

and vocational colleges. Thus, the recent success cases in this area benefited

from a strong national emphasis on advanced technical education that dates back

to at least one or two generations. Strong human capital in software cannot

emerge within a few years. Competitive human capital, perhaps more than other

factors in the model, emerges only after many years of national investment in

education. The quantity of specific human capital is important as well. A critical

mass of educated and skilled human capital is vital to the success of the software

industry.

India has one of the largest pools of technically qualified people in software,

IT and ITES. India’s key strength is the availability of a large pool of English-

speaking and technically qualified professionals at low costs. A large proportion

of Indian graduates are proficient in English, ideally suited to the growth of the

ITES industry. India houses world-class technical institutes such as the IIsc’s

(Indian Institute of Science), IITs (Indian Institute of Technology) and NITs

(National Institute of Technology), and a vast pool of state and private

universities, affiliated graduate and postgraduate colleges, which produce skilled

talent required by the industry. There are 350 universities and over 17,500 higher

educational institutions producing 3 million graduates, including 400,000

engineers (second only to China) and 225,000 IT professionals, every year in

India. As a result, companies have sufficient options to choose from, while

recruiting employees for their offshore captive centres. Further, it is expected that

the number of people in the working age group in India will increase by 250 million

during the period 2003-2020, at an average rate of about 15 million per year.

This will ensure labor for companies in the US and Europe, where the demand

for labor is increasing.



Composition

A nation’s software human capital is not uniform across the spectrum, as at the

higher end, we have highly talented and capable workforce, while at the lower

end, we have trained and skilled workforce. Still there is better synchronization

between both ends. India has a good composition of younger population.

Over 50 percent of India’s population is below 25 years of age.

Language Skills

English language ability has been very critical in national software success.

English skills appear on outsourcers’ checklists as a key criterion to decide on

the capabilities of software firms and software nations. English language skills

stem either from some historical connection with England or from national

investments in language education, beginning in early school years. India enjoys

advantages from both of these factors.

Management and Technical Skills

Technical and management skills are needed in order to manage successful firms.

For IT firms, resources can take the form of technical skills such as expertise in

specification, requirement analysis, design, coding or programming, and testing.

It also reflects the ability to integrate emerging technologies with a firm’s strategic

objectives. They can also take the form of management skills, such as the ability

to establish close links with the user community, the ability to effectively develop

appropriate cost-effective IT applications, and the ability to anticipate future IT

needs. The strategic value of resources can be viewed as the extent to which

these resources have an impact on the growth, prosperity and competitiveness

of the firm. Such skills tend to be taught in business and engineering schools.

So, it is the professionalization of technical and management education that is

necessary in order to build national software exporting industries. India is

experienced in software development and has been in the industry since the late

1980s. India possesses good management and process skills, and has a strong

business school network. There are 1,100 business schools in India producing

over 70,000 MBA graduates a year. 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 is

a major strength. Low training costs in India allow these professionals to be

continually updated on emerging technologies—a critical success factor in an era

of shortened technology life cycles.

Wages/Cost Advantages

Managers buying the so-called offshore outsourcing services tend to shop for the

lowest-cost supplier. These software development costs are mainly driven by the

wages of junior programmers to the experienced project managers. As is evident

from the wage pyramid given in Figure 3, the differences in wage rates are striking

and very tempting for managers who are under cost pressures. Over the recent


years, wages in India have gone up, and India is no longer the lowest-cost

software nation. Instead, firms are turning to China, Vietnam and others, where

wages may be lower. This is the race to the bottom of the pyramid of software

outsourcing. There is relatively little that nations can do to compete in this cycle,

in which interest of the outsourcer quickly shifts to lower wage nations.

It is important to mention here that this dynamism is not unique to software.

In the post-war period, industrial manufacturing first shifted to Japan, which then

became too expensive. Then it shifted to Korea and Taiwan, which also became

too expensive, before it shifted to China, Thailand and elsewhere.

This phenomenon can be defined in purely financial terms. By placing offshore

software outsourcing in the context of global technology arbitrage, this

phenomenon can be defined as, “sourcing labor and capital where it is cheapest,

and selling it where it is most profitable. National borders do not matter”.

One of the biggest advantages of offshoring to India is significant cost savings.

Companies have been able to save about 40 to 60 percent of the costs compared

to what it would be in the western countries, for most services, by outsourcing

processes to India, thus allowing organizations a great competitive edge.

Cost savings in India can be accounted for by savings under the following two heads:

1. There is a vast difference in the labor costs in the US/Europe and India.

Indian professionals work for wages much lower than that in the US and

Europe. An IT professional with 1-2 years of experience in the US and

Europe charges $50,000 to 70,000 per year. On the other hand,

Figure 3: Wage Pyramid: Wages for Software

$63,000

$44,000

$75,000

$5,000-$10,000

USA

Japan

Russia

India China Indonesia Ukraine

$5,000-

$8,000

$5,000 $5,000$5,000-

$9,000



a professional with the same experience level costs about $8,000 per

year in India, about 11 to 16 percent of that in the US and Europe.

2. Infrastructure costs in India are lower compared to the western

countries, thus saving significantly on investment capital requirement for

a project infrastructure.

Government Policy, Support and Vision

Many of the new software exporting nations succeeded because their government

took active steps to encourage the high-tech sector in general, and the software

industry in particular. Such policies have been given many labels—industrial policy,

science and technology policy, and innovation policy (Salmenkaita and Salo, 2002).

Basically, these policies channel national resources into sectors that the

government views as important to future economic growth. Heeks and Nicholson

(2002) point to the difference in national policy between the initial strategy and

the succeeding strategy/sustaining strategy. The sustaining strategy for India has

been climbing the value chain, which develops the strategy for diversification,

innovation and differentiation, and a shift from economy of scale to economy of

scope. In a minority of cases, the government had little to do with setting a vision

for the software export industry, but the industry succeeded anyway because

of favorable domestic and global factors. Emergence of Y2K and an increased

thrust on cost competitiveness because of globalization, has also contributed to

the success of the Indian software sector. The case of India may be one such,

though there are conflicting opinions about the deliberateness of the government

policies. Clearly, India’s economic liberalization in 1991 was a turning point.

Government can play a proactive or facilitating role. The government can

influence/facilitate the development of telecommunications infrastructure, the

availability of capital, including risk capital, the vibrancy of the industry, human

capital (through investment in education), quality of life, and wage levels. In 1991,

the government’s Ministry of Information Technology created the STPI (Software

Technology Parks of India) to encourage exports. At 41 locations across the

country, the STPI provides IT firms with services covering network design, system

integration, installation, operations and maintenance of application networks.

The Government of India has also set up innovative schemes like the SEZs (Special

Economy Zones) for promoting software exports. Of the 366 SEZs formally

approved by the government so far, as on October 15, 2007, 257 are for IT and

ITES accounting for 70 percent. Under the SEZ scheme, several tax incentives

are extended for 15 years. The Indian government also offers tax holidays under

Section 10A and 10B of the Income-Tax Act on various IT-enabled products and

services. India’s record on information security ranks better than most locations

in the world. The Indian government is maintaining a keen emphasis on further

strengthening the information security environment in the country. Specific

initiatives already underway include enhancing the legal framework through


proposed amendments to the IT Act 2000, increasing interaction between

industry players and enforcement agencies to help create greater awareness

about information security issues, and facilitating mutual support.

Strong Quality Focus

Quality is the hallmark of Indian IT software and services. ISO 9000 certification

and SEI Level 5 are the order of the day. A majority of companies in India have

already aligned their internal processes and practices to international standards

such as the ISO 9000, Six Sigma, SEI-CMM (Capability Maturity Model) Level 5,

etc., which have helped to establish India as a credible sourcing destination, as

organizations are able to take advantage of their availability of robust processes,

documentation, etc., and focus on areas such as continuous process

improvement. As of December 2005, over 400 Indian companies had acquired

quality certifications with 87 companies certified as SEI-CMM Level 5—higher than

any other country in the field. High quality knowledge workers and attractive price

performance have been key components of India’s value proposition.

The Industry

Clusters

Cluster effects are essential characteristics of the industry itself

(Tessler et al., 2003). The best known high-tech cluster is Silicon Valley in the US.

In developing nations, the software industries are clustered around the large

metropolitan business areas, or in technology parks, because of the availability

of infrastructure. A cluster represents a critical mass of firms in geographic

proximity. Technology clusters are often deliberate government policy initiatives,

such as the Science Park in western Singapore near the major universities. Cluster

effects confer a positive benefit on an individual firm in the cluster, independent

of other firm characteristics. Cluster effects give rise to an environment of both

competition and cooperation among the firms. Competition spurs innovation,

cooperation spurs growth. Cluster effects also give rise to professional networks.

Indian STPs and SEZs are well-known examples of cluster effects.

Association/Body

Success is also aided by the software firms’ ability to pool some resources into

a national association or consortia that serve to promote the nation’s industry

locally and globally and provide services back to its member firms. Such a case

is the prominent Indian association NASSCOM (National Association of Software

and Services Companies), which helped the branding (in the marketing sense)

of the Indian software industry. NASSCOM is India’s premier trade body of the

IT software and services industry with 1200 members. NASSCOM is also a lobbying

body for representing issues of the software industry to the government.

Vision

Heeks and Nicholson (2002) conceive that the success of the national industry

is driven by the coherence of the industry’s (and to some extent the



government’s) vision and strategy in defining the industry’s focus. Malaysia set

its vision early on multimedia and built the ‘multimedia corridor’ between Kuala

Lampur and the airport.

Standards

Finally, the success of the Indian software industry has demonstrated that

attaining internationally-recognized standards of quality is an important

component of the industry focus. These standards address the following

problem—outsourcing software and services requirement to a distant, exotic

foreign firm is a risky proposition. The Indian industry understood this predicament

early by embracing the CMM. CMM is a structured process for software

development, associated with the Software Engineering Institute at Carnegie

Mellon University. It consists of five maturity levels. An SEI-CMM rating brings

credibility to the process of software development being used by the firm. It plays

a specific role in getting work for the company. Now that Indian firms have

acquired the highest international quality standards, and practise these

standards with greater success than do most of the US organizations, India is

seen as a safe (or even the most preferred) destination in this regard.

Capital

A software industry must acquire enough capital to grow. The Indian software

industry has been able to grow predominantly from the working capital

(internally funded), which is unlikely to be enough, now that the global software

industry has become more competitive. Capital sources for software firms can be

a combination of domestic and foreign. Domestic sources include government

funds, venture capital, investment capital and equity offerings. Foreign sources

include foreign loans, venture capital, investment capital (Foreign Direct

Investment/FDI), foreign equity offerings and foreign aid.

Project/Technological Infrastructure

Technological infrastructure refers to the sophistication and reliability of

communication technology. Software firms require abundant, reliable, and cheap

telephone and broadband data communication connections. The case of India is

instructive. Beginning in the 1980s, the Indian software firms have bypassed the

unreliable terrestrial infrastructure by using satellite technology to communicate

between top Indian software enterprises and clients abroad. In cases where this

infrastructure is absent on a national basis, ‘cluster-centered infrastructure’

(technology parks or high-tech office centers) is the preferred alternative for

software firms. For example, the Philippines is sprinkled with such parks that

advertise high connectivity. Clustering also addresses other infrastructural

needs—Indian firms usually operate in buildings and technology parks with

alternative power generation to compensate for unreliable public sources. India

administers one of the largest telecom networks in Asia, and is the fifth largest

in the world with 50 million telephone lines and 700,000 kms route of fibre optic

cable network. Over 33,000 VSATs (Very Small Aperture Terminal) are installed all


over the country by various service providers, private users and government

agencies.

Linkages

Linkages are essential to business. Managers choose business links that they

view as minimizing their perceived costs of doing business (Kogut and

Singh, 1988).

Linguistic Linkages

Linguistic linkages are very powerful linkages. Since English has always been the

dominant language of computing and business, English skills tend to be a critical

linkage. The success of India (a former British colony) is, in part, attributed to

this English fluency. The importance of English is somewhat diminishing.

New regional linkages have begun emerging in recent years that weaken the

traditional dominance of English. The Chinese have capitalized on their closer

linguistic and cultural ties with the Japanese to become a destination for offshore

work.

Diaspora Linkages

Diaspora linkage also has been a critical success factor. To illustrate, the success

of the Indian software industry is due in part to the successful and well-placed

diaspora of Indians in the US high-tech firms. This generation of Indians who came

to the US for education, stayed on and rose to influential positions in these firms.

The ‘brain drain’ has become a ‘brain gain’ or a ‘reverse brain drain’, in the ties

and know-how that have been forged between firms in the home country and

the diasporic country. These scientists and engineers left their home countries

and sometimes many years later, returned, or invested in, or encouraged

acquisition in their home countries. These diaspora linkages are also evident in

other countries, such as Israel, Taiwan, Korea, China and Ireland, that have

succeeded in high technology. India has a supportive diaspora with proven

entrepreneurial skills, as 40 percent of the US start-ups have Indians among the

top five executives.

Time-Zone Linkage

It facilitates communication with customers in the US and capitalizing on same

time zone advantages with the US. While the US sleeps, India works. India’s

unique geographic positioning makes this possible. India and the US have a zonal

time difference of about 12 hours, thus effectively giving firms a 24-hour work

environment. Most of the processing functions are performed during the daytime

in India, when it is nighttime in the developed countries. As a result of this zonal

time difference, there is no or little backlog in the front end and processing tasks.

The advantage of this zonal time difference is more prominent in IT outsourcing.

Many IT projects have onsite and offsite teams. The onsite team works during

the day at the client site and hands over the work to the Indian team before

retiring to bed. The offsite team then works on the same project as it is daytime



in India. When the Indian team retires to bed, the onsite team takes over the

work, thus, significantly reducing the project turnaround time. Nortel Networks,

an IT firm headquartered in Canada, started its operations in India to harness

the benefits of the time difference between India and Canada, along with cost

savings.

Emerging Strategies for the Indian Software Industry:A Resource-Based Analysis

Situation of ample low-cost resources provides

cost advantages in delivery of final products

and services. For the Indian software industry,

there were many low-cost resource advantages

since the very beginning, viz., low wages,

large pool of English speakers, highly educated

and skilled workforce, low infrastructural cost,

etc. When these resources gradually diminish

and become scare, the cost competitiveness

would get reduced. Countries or firms can sell

anything if it is quality product, yet cheap

enough. But as a country continues to sell cheap products to the world market,

its economy improves and wages go up along with its input costs. Subsequently,

those cheap products get more expensive. Business is again relocated to another

low-cost country and ultimately the country’s global business goes down. Take the

example of the ‘Barbie doll’. Barbie is a global brand that did $3 bn business (sales)

in year 2007. In each decade, Barbie shifted her home, as shown in Table 1.

It can be concluded that when the Chinese economy improves substantially,

its wages will go up, the production costs will also go up, and Barbie will again

be looking for a new home. No country has ever achieved sustainable competitive

advantages by building cheap commodity products to sell to the world market.

In the long run, the only way a country ever achieved competitive advantages

was by building great brands to sell to the world market. Low-cost resource

advantages coupled with economy of scale provides cost competitiveness, but

it is not sustainable in the long run.

Indian IT firms are at the lower end of the global software market, focusing

mainly on low-cost outsourcing job. For example, both Infosys and Capgemini had

an employee force of around 70,000 employees. However, while Capgemini

managed a revenue of $13 bn, with the same work force, Infosys could only

manage $3 bn. Indian firms should brand themselves on the global stage as a

supplier of value skills. Indian software firms have to change their role from being

providers of commoditized contract labor services, to becoming product/branded

solutions consultants. Many Indian firms are not going beyond ‘contract rate’

based competition. This has resulted in giving more weightage on contract billing

rates rather than on the unique quality of the product.

Table 1: Barbie in Search of

New Home

Time Home of Barbie

Period (Made in)

1960s Japan

1970s Hong Kong

1980s Philippines

1990s Indonesia

2000s China


Ultimately, in order to succeed as the dominant knowledge industry, Indian

software firms need to specialize in some domain/niche areas, either in specific

services or products. For example, Israeli firms specialize in enterprise software,

and storage and data solutions, which enhance corporate efficiency as well as

security-related IT systems, including Internet security, e-mail surveillance, data

mining, data fusion, situational awareness, and pattern and image recognition.

Those national industries that sell only commodity products and have not

specialized are less likely to succeed in the long run, and would quickly lose

competitive advantages.

Dynamic Resource-Based Model for the Software Industry

Based on cost and differentiation advantages, products can be divided into two

types—commodities and brands. The only way to sell a commodity is by selling

it cheaper than market competitors. A brand, on the other hand, is a product that

is distinct and different with unique value proposition. In the long run, a country

needs to build brands to sell to the world market, not commodities. Sooner or

later, a commodity-driven country will reach a trip point where its products are

not competitive anymore, and further, growth would become difficult. Countries

or firms do not build long-term competitive advantages with commodities. They

need to build strong brands by allocating big budgets for branding and

advertising, to reap long-term benefits.

Figure 4 represents the dynamic resource-based model. This model has 4

quadrants. Quadrant 1 represents ‘Low-Cost Resources – Low-Cost Resource

Advantages’ (High-High), Quadrant 2 represents ‘Low-Cost Resources –

Figure 4: The Dynamic Resource-Based Model

L H

H L

Differentiated Resources

Low-Cost Resources

Differentiation

Advantages

Low-Cost

Advantages

To be avoided

Quadrant 4

Premiumization

Quadrant 3

Commoditization

Quadrant 1

To be avoided

Quadrant 2



Differentiated Resource Advantages’ (Low-Low), Quadrant 3 represents

‘Differentiated Resources – Differentiated Resource Advantages’ (High-High), and

Quadrant 4 represents ‘Low-Cost Resource Advantages – Differentiated Resources’

(Low-Low). To maintain a dominant position in the software market, India should

move up from Low-Cost Resource Advantages (Quadrant 1) to Differentiated

Resource Advantages (Quadrant 3). In that situation, differentiation strategy

creates domain specialization for long-term competitive advantages. Similarly, with

the lack of cost advantages or differentiation advantages, it is difficult to maintain

competitive advantages. These prospective effects are represented by the 4

quadrants of the dynamic resource-based model, as is given in Figure 4. The salient

features of Quadrants 1 and 3 are given below:

Quadrant 1 (Low-Cost Resource Advantages):

In the scenario when the ‘Low-Cost Resource Advantage’ is high, it gives big

cost advantages as shown in Quadrant 1. It is characterized by low price action.

Initially, India was having many low-cost resources for software outsourcing.

Hence, it ultimately benefited from big cost saving. This is because of the

commoditization of software coding jobs. Till now, India was enjoying this benefit

of cost competency.

Quadrant 3 (Differentiated Resource Advantages):

In the scenario when ‘Differentiated Resource Advantage’ is high, as shown

in Quadrant 3, it provides benefits of specialization and premiumization. It is

characterized by high price action. For maintaining long-term growth and

sustainability of the Indian software industry, much emphasis is being laid on

Figure 5: Dynamic Resource-Based Cube Model

Differentiation

Advantages1-9-9

1-9-1

1-1-19-1-1

1

4

9

1

4

9

9-9-9

9 4 1

Low-Cost

Advantages

9-9-1

Commoditization

Low-Cost

Resources

Differentiated

ResourcesPremiumization

9-1-91-1-9

To be

Avoided


Table 2: Values of the Edges of the Cube and Their Interpretation

Value Interpretation

1-1-1 Lack of competitive advantages

1-9-1 Unproductive differentiated resources

1-1-9 Unproductive low-cost resources

1-9-9 Unproductive overall resources

9-1-1 Unsustainable low-cost advantages

9-9-1 Differentiated resource advantages

9-1-9 Low-cost resource advantages

9-9-9 Overall competitive advantages

Dynamic Resource-Based Model: Implication for the IndianSoftware Industry

High wages, rising rupee, high attrition rate, high infrastructural cost, expiry of

government incentive scheme (IT exemption), etc., put tremendous pressure on

the performance of the Indian software industry. Wages of Indian IT professionals

are growing rapidly. According to Hewitt Associates, India had the highest

average salary increase in Asia in 2007. Across a range of industrial sectors,

software accounted for the highest wage bills at a time when competitive

pressure was pushing billing rates downwards. In the last few years, there was

an average wage hike of 14-15 percent for the offshore employees and 3-5

percent for the onsite staff. In the process, they have been closing the gap

between India and other emerging IT destinations. The Indian Rupee has

appreciated by 12 percent against the US $ in the last 12 months.

To cope with these pressures, the Indian software firms need to climb the value

chain and expand their product and service ranges, focused towards higher value

processes and product development services, rather than being confined to

providing ‘low-cost’ labor based on hourly rates. Indian firms should move to niche

moving up the software value chain. The upper segment of the value chain, i.e.,

the products, require strong R&D base, alliance with academic and research

institutes, high amount of technical, marketing and selling skills, and is a

high-risk and high-return segment. Innovation through R&D involves large

financial resources, long time span, and technical competence. Microsoft, Oracle,

SAS, etc., spend heavily on R&D; for example, SAS spends 40 percent of income

on research. Many Indian IT firms are still operating at the lower end of the value

chain, while the higher end of value chain is dominated by consulting firms such

as PriceWaterhouseCoopers, McKinsey, Capgemini and product-oriented software

firms such as Oracle, etc. A three-dimensional dynamic resource-based cube

model is shown in Figure 5.

Table 2 explains the values of the edges of the cube shown in Figure 5, with

interpretations in terms of resources.



product of specialization with high price, that is, differentiated product. The Indian

IT firms must strive to move up the value chain—from being once considered as

mere providers of low-cost back-end commodity services—to offering high value

consulting, solutions and software product offerings.

For the Indian software industry, it is necessary to continuously build up

resources and capabilities, and move from ‘low-cost’ commodity business model

of coding and programming to the ‘differentiated’ premium product model. Here,

‘premium product’ signifies the association of high level of skill sets and resources

for commanding premium and demand for the product in the marketplace.

High profit margins, brand building and long-term competitive advantages are the

main benefits of such differentiation strategy. To move from low skills-based

programming and maintenance jobs to high knowledge-based product

development, it is essential to club domain expertise with leading edge

technologies through major R&D investments. This would help in meeting the

challenges in developing new products, thereby offering long-term earning

potential and sustainable competitive advantages.

Future Outlook

The Indian software industry faces a difficult challenge. Can it move its position

beyond selling commodity skills in programming (e.g., experience with platform

A or programming language B), with little specialization and differentiation?

Meanwhile, global software competition continues to broaden and become even

more competitive. The resource-based theory of the firm (Wernerfelt, 1984)

argues that in order to gain a sustained competitive advantage, firms must

develop firm-specific resources or capabilities that are valuable, rare, or costly

to copy. It is quite unlikely that being a low-cost software producer, by competing

simply on low wages for commodity-type skills, is the path to a sustainable

position. If Indian software industries do not add value beyond simply being the

low-cost producer, they will soon see their work shift to lower-cost destinations.

This is the ‘race to the bottom’ (of the wage scale) that typifies such commodity

work. Software work moved first to India because of low wages. But recently,

many outsourcing firms are looking to nations where wages are even lower.

Conclusion

India is almost a synonym for IT and ITES outsourcing and is the most preferred

outsourcing destination. With increasing competition from emerging IT-savvy

countries, increasing raw wages, along with appreciating rupee, margins are

reducing for the Indian IT firms. India needs to parallely develop a

product-oriented industry along with the service-oriented industry, and climb the

value chain. Instead of defending low-wage jobs, Indian IT firms should move

to becoming providers of high-value, high-margin services. Only nations which can

predict the future and initiate changes to prepare themselves for the challenges

ahead can survive in an era of intense competition and globalization.�


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