Consolidation in the Application Industry is Rarely New: Obsess About It or Danger Getting rid of it All

Some analysts credit history [Larry] Ellison with anticipating the consolidation in the company program industry and foremost the charge. Ellison &#145named a significant change in an entire industry, which was amazing.&#146(1)

Anticipating consolidation? Calling a significant change? Didn&#146t Microsoft begin as a Pc operating process vendor in 1975? In the eighties they owned the desktop, right now they&#146re throughout the organization. Personal computer Associates started with a form software in 1976. Now its products suite presents one particular-end buying for running the organization. And in 1973 SAP was offering an accounting package deal in Germany. Nowadays its computer software automates the worldwide enterprise from the shop flooring to get success. Isn&#146t predicting consolidation in the computer software sector about as prescient as predicting that the solar is heading to rise in the morning?

Consolidation is frequent in several industries, but a few components make the phenomenon of consolidation in the software package industries, (FN 2) an ongoing repeatable occasion. The 1st aspect is the natural evolution of program merchandise and industries. New computer software industries start off by delivering solutions to market markets. This is, however, only the evolutionary setting up level. Just about every sector has finite advancement, and area of interest prospects reach their limit quickly. As soon as the confines are actualized, a company, to go on expanding, must develop their merchandise&#146s abilities by achieving into one more sector to consolidate/converge added functionality.

The next component is software to software program interconnectivity. Interconnectivity can make it so basic to converge solutions from a single computer software market to the subsequent, it encourages consolidation. Open systems, support oriented architectures, programming interfaces and programming languages were being created to aid the interconnection of varied computer software goods, making the system of expanding development-promising operation by consolidating merchandise reasonably straightforward.

The third aspect: large-margin merchandise and receptive investors, makes other industries envious of application. Margins normally develop substantial war chests, and aggressive investors can make bank vaults that offer completely ready funding for acquisition-led consolidation procedures that guarantee options for growth. Consolidation, however, is not normally achieved by using acquisition. New capabilities can be crafted internally. The dilemma with this technique is that most corporations locate setting up paths into new industries difficult. It does involve analysis, resources and focused execution. It also takes time. Many businesses, failing to embrace that software program lifecycles are time-compressed by intense competitors and advancements in technology, are caught off-guard by how speedily their business gets to be saturated.

Then there is the problem of competitors for interior resources. Software package companies are faced with non-cease opinions from demanding consumers that have an unquenchable thirst for simplifying the complexities of facts technological know-how. And all of us know that the squeaky wheel will get the grease. This range of issues leaves companies without the need of sufficient time to &#147create&#148 a path, making the buy option incredibly attractive. Getting even though, is desirable in its own right since it provides instantaneous gratification and a single-upmanship. Of study course, nicely-heeled rivals in an exertion to near the aggressive hole can take the in the same way expeditious invest in route and the process of marketplace consolidation is now on a fast observe.

Organic evolution, interconnectivity, offered funding, and client and aggressive pressures have been fueling computer software consolidation for a long time and there is no conclude in sight. Its an ongoing state of affairs of eliminate or be killed. Application corporations that don&#146t keep a current approach for consolidating or currently being consolidated experience extinction.

The machination of consolidation in the program industries performs out like an ongoing match of tiny fish, large fish. And somewhere there&#146s usually a hungrier greater fish (or 1 that wishes to be more substantial), who is a looming consolidator. As an field competitor in the ongoing recreation of consolidation there are 4 feasible roles that can be performed: consolidatee or minimal fish, consolidator or big fish, niche player or puffer fish (a fish with constrained charm), and odd-man out or the floating dead fish. Organizations responsibly taking part in any of the to start with three roles will choose practical competitive positions for their respective roles the fourth, and the most generally played function of the lifeless fish does not.

The collection, although, of a feasible competitive place is not a solitary event it is a thing that has to be repeatedly up-to-date as an marketplace progresses as a result of its lifecycle. This is for the reason that the two the character of an industry and the practicality of any aggressive posture are continuously transforming. In the introductory phase of an business&#146s lifecycle there could be a thousand viable positions. By the time the mature phase rolls around, (1) the range of practical positions will be amalgamated into a couple of based mostly on exceptional performance, cost or marketplaces served, and (2) an industry as soon as focused on fixing trouble X is now resolving A as a result of X.

This implies that the path from the introductory to the experienced phase will be strewn with carnage, but there will also be some lengthy-phrase wholesome area of interest survivors and some big winners. The potential customers for getting victorious will be significantly improved with an comprehension of the interactions in between lifecycle phases, aggressive positioning and consolidation.

An industry&#146s introductory section. In the introductory section, an field&#146s early entrants lead a lifestyle of aggressive luxury. Opponents are couple of and considerably in between, tiny in measurement and usually unsophisticated organization-smart. The customers are the early-adopter styles who have few expectations past some rudimentary resolution. This qualified prospects to a situation where there can be quite a few possible (a subset of possible) aggressive positions enjoyable market needs, most of which are much too modest to stand for feasible business products. See Determine 1. (Figures did not duplicate properly. Go to [ and select the articles page to download a copy of this article with figures.)

The various positions in the introductory phase may be more or less “equal” at this point, but this equality does not pertain to future value. Some positions will be:

(1) more appealing to consolidatees because they cater to the likely interests of future consolidators;

(2) better for building a path of continuous growth that could lead to a superior exit opportunity or a dominant competitive position and to assuming the role of a future consolidator; or

(3) superior for building a lasting profitable niche position.

In order to understand which competitive positions are best suited to achieving any one of these three outcomes, it’s necessary to identify who the future consolidators are likely to be along with their probable motivations. The future consolidators (FC) will come from two sources: (1) current and (2) prospective competitors (PCs).

Deciding which of the current competitors are candidates for FCs may not be easy because the companies in the introductory phase are often small with limited budgets and resources. However, those companies who are led by industry experienced managers with vision, who have gained early market and technology leadership, and who have sufficient access to funds are reasonable bets. The PCs, on the other hand, may be easier to spot. They’re established companies who view participating in this industry as strategically sensible, under one condition–the goodness of the industry’s opportunity must be validated. Until validation occurs PCs sit on the sidelines actively or passively tracking an industry’s prospects.

Once the future consolidators have been identified, the next step is to decide which positions these companies are likely to stake out. Once this has been thoughtfully estimated in a process that requires analyzing each FC’s possible or known product and market strategies, the information is available for the current competitors to plan the positions of their products to be an attractive consolidatee, a durable niche player targeting a position the consolidators will probably shun, or a future consolidator who now has a fair idea of how to build a defensible position.

An industry’s early growth phase. In the early growth phase life takes on a decidedly different flavor. With the industry past its validation phase, the smell of money brings competitors out of the woodwork. One of the most formidable groups are the prospective competitors, many who are now prepared to shed their prospective qualifier and make a grand entrance by acquiring a suitable competitor. PCs often have complementary products, deep pockets, big customer bases, established channels, professional service organizations, and recognized brands. Armed with these advantages, these latecomers will substantively raise the competitive bar. This process of elevating the threshold may lead to redefining the industry and will redefine what constitutes a viable competitive position (See Figure 2), and it will alter the profile of the target customer. Gone are the days when customers were few in number and happy to pay a premium for a little piece of desirable functionality. Instead, customers are increasingly numerous, and demanding more functionality. All of the changes lay the groundwork for the first wave of consolidation.

All competitors, at this point, must re-evaluate the viability and strength of their current competitive positions relative to all other competitors, including any still looming PCs, in order to assess the goodness of their situation within the modified population of role-appropriate viable competitive positions. This updated appraisal should be used to strengthen or revise a competitor’s competitive position relative to their designated role. This is achieved by reinforcing the company’s product strategy on some element of functionality or price, and/or fortifying or augmenting markets served

Shakeout – the later growth phase. During the latter part of the growth phase competition for the growing number of increasingly demanding customers can become so intense that no one’s making money. This ignites a survival of the fittest shakeout, where the competitive bar is raised still higher. The fittest will have the strongest competitive positions on functionality and/or price and/or markets served. They’ll also have the financial resources to defend their positions against competitors aggressively pricing products without regard to cost, and interlopers with crafty marketing messages and costly campaigns that dupe customer into thinking that they have the superior position.

Consolidators are now working in overdrive to secure their place as a competitor with a dominant industry position. This means that consolidatees must be working overtime to see the fruition of their objective to be consolidated. Failure to do so could turn a little fish into a floating dead fish, because the consolidatee’s solution is now priced uncompetitively and/or available as a feature of a product holding a functionally superior position.

To the survivors, go the riches. Companies that survive the shakeout will hold clearly different positions (See Figure 3), that offer a promise for profitability, and they will enjoy a respite in ruthless price competition and costly hand-to-hand combat for customers. This though should not be viewed as an invitation to become complacent for two consequential reasons. First, the survivors, in anticipation of the inevitable flattening of growth that accompanies an industry’s mature phase, will need to be working diligently to determine the company’s next new product/industry in order to ensure continued growth. Second, survivors must support their positions against onlookers looking for openings that arise from arrogance or apathy and the actions of other survivors who will soon become frustrated by the leveling of growth and view one final round of consolidation as a means to buy revenue. Beware. Consolidation in this case is not a strategy for sustaining growth. You can consolidate mature A and B, but in the end you have mature AB, because the size of the world is constant. You can ask HP’s former CEO, Carly Fiorina, about the limits of consolidation as a growth strategy.

Conclusion. Only companies that can continually stake-out and restake-out competitive positions that are valued by the inevitable consolidators, or create and reinforce the position of consolidator, or target profitable niche markets will survive. You can’t avoid the underlying theme of consolidation that is constantly at work as software executives aggressively endeavor to execute strategies to secure an ongoing healthy existence, best the competition and deliver growth that will endear them to their shareholders.


1 Pimental, B. (May 6, 2005) San Francisco Chronicle.

2 The definition of an industry, as used here, is an adaptation from Michael Porter (Competitive Advantage, 1980, The Free Press, NY). It is the sum total of all companies offering products that solve a similar customer need (the direct and indirect competitors) and all other companies that exert influential forces on the success of the competitors. Defined in this way it is easy to see how the umbrella software industry is composed of many distinct software industries, and why search engine software does not compete with computer aided design software.

© 2005 Kathleen Brush,