Consolidation in the software industry is hardly new: obsess or risk losing everything

Some credit analysts [Larry] Ellison with anticipating consolidation in the enterprise software industry and led the lead. Ellison & # 145; mentioned a big shift in an entire market, which was impressive. & # 146; (1)

Anticipating consolidation? Calling a big shift? Didn’t Microsoft start in 1975 as a supplier of PC operating systems? In the 1980s they owned the desktop, today they are across the enterprise. Computer Associates started a sorting program in 1976. Now the product suite offers one-stop shopping for managing the enterprise. And in 1973 SAP sold an accounting package in Germany. Today, the software automates the global enterprise from the shop floor to order fulfillment. Isn’t consolidation in the software industry about as progressive as predicting the sun to rise in the morning?

Consolidation is common in many industries, but three factors make the phenomenon of software industry consolidation (FN 2) a constantly repeatable event. The first factor is the natural evolution of software products and industries. New software industries are starting to provide solutions for niche markets. However, this is only the evolutionary premise. Every industry has finite growth and niche opportunities are rapidly reaching their limits. Once the limitations are realized, in order to continue to grow, a company must expand the capabilities of its product by reaching another industry to consolidate / bring together additional functionality.

The second factor is the interconnectivity between software and software. Interconnectivity makes it so easy to converge products from one software industry to another, it promotes consolidation. Open systems, service-oriented architectures, programming interfaces and programming languages ​​were created to facilitate the interconnection of various software products, making the process of expanding growth-promising functionality by consolidating products relatively simple.

The third factor: high margin products and responsive investors make other industries jealous of software. Margins often create huge war chests, and aggressive investors can create bank vaults that provide easy financing for acquisition-led consolidation strategies that promise growth opportunities. Consolidation does not always go through acquisition, however. New possibilities can be built up internally. The problem with this approach is that most companies find it difficult to build roads into new industries. It requires research, resources and targeted execution. It also takes time. Many companies who do not accept that software lifecycles are compressed by intense competition and technological advancements are blown away by how quickly their industry is becoming saturated.

Then there is the problem of competition for internal resources. Software companies face non-stop feedback from discerning customers who have an insatiable appetite to simplify the complexities of information technology. And we all know the squeaky wheel is getting the grease. Due to this variety of challenges, companies do not have enough time to & # 147; build & # 148; a path, which makes the purchase option very attractive. Buying in itself is attractive because it provides instant gratification and sole proprietorship. Of course, in an effort to close the competitive gap, wealthy competitors may follow the equally fast buying route and the industry’s consolidation process is now accelerating.

Natural evolution, interconnectivity, available financing, and customer and competitive pressures have fueled software consolidation for decades and the end is not yet in sight. It’s an ongoing scenario of kill or be killed. Software companies that do not maintain a current consolidation or consolidation strategy are in danger of extinction.

Machine consolidation in the software industry plays out like a continuous game of small fish, big fish. And somewhere there is always a hungry bigger fish (or one that wants to be bigger), who is a menacing consolidator. As an industry competitor in the ongoing game of consolidation, there are four possible roles that can be played: consolidatee or little fish, consolidator or big fish, niche or pufferfish (a fish with limited appeal), and odd-man out of the floating dead fish. Companies that responsibly fulfill any of the first three roles will select viable competitive positions for their respective roles; the fourth, and most played, role of the dead fish is not.

However, the selection of a viable competitive position is not a lonely event; it is something that must be constantly updated as an industry progresses in its life cycle. This is because both the nature of an industry and the usefulness of a competitive position are constantly changing. In the introductory phase of an industry’s life cycle, there can be a thousand viable positions. By the time the maturity stage rolls around, (1) the number of viable positions will merge into a pair based on superior functionality, price or markets served, and (2) an industry once focused on problem solving X, now solves A via X.

This implies that the path from the Preliminary to the Adult stage will be riddled with carnage, but there will also be some healthy long-term niche survivors and some big winners. The outlook for triumph will be greatly enhanced with understanding the relationships between life cycle stages, competitiveness and consolidation.

The introduction phase of an industry. In the launch phase, an industry’s early entrants lead a life of competitive luxury. Few competitors, small in stature and often straightforwardly businesslike. The customers are the early adopter types who have little expectations beyond some rudimentary solution. This leads to a situation where there may be many likely (a subset of possible) competitive positions that meet niche needs, most of which are too small to represent viable business models. See Figure 1. (The pictures were not copied correctly. Go to [] and select the articles page to download a copy of this article with figures.)

The different positions in the introductory phase can more or less & # 147; equal & # 148; at this point, but this equality does not refer to future value. Some features are:

(1) more attractive to consolidators because they are responsive to the likely interests of future consolidators;

(2) better to create a path of continued growth that could lead to a superior exit opportunity or a dominant competitive position and to assume the role of future consolidator; or

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

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

It may not be easy to decide which of the current competitors are candidates for FCs, as the companies in the launch phase are often small with limited budgets and resources. Companies led by experienced managers with industry vision, who have gained market and technology leadership early on, and who have adequate access to funds are reasonable bets. On the other hand, the PCs may be easier to spot. They are established companies that view participation in this industry as strategically sensitive, under one condition: the goodness of the industry opportunity must be validated. Until validation takes place, PCs sit on the sidelines, actively or passively tracking an industry’s outlook.

Once the future consolidators have been identified, the next step is to decide what positions these companies are likely to take. Once this has been carefully assessed in a process that requires analysis of each FC’s potential or known product and market strategies, the information is available to current competitors to plan the positions of their products to consolidate an attractive, sustainable niche. to become. player targeting a position that the consolidators are likely to avoid, or a prospective consolidator who now has a good idea of ​​how to build a defensible position.

The early growth phase of an industry. Life takes on a distinctly different flavor in the early growth phase. Now that the industry is past the validation phase, the smell of money is taking competitors out of the woodwork. One of the most formidable groups is the potential competitors, many who are now willing to ditch their future qualifier and make a grand entrance by acquiring a suitable competitor. PCs often have complementary products, deep pockets, large customer bases, established channels, professional service organizations, and recognized brands. Armed with these advantages, these latecomers will substantially step up the competition. This process of raising the threshold can lead to a redefinition of the industry and will redefine a viable competitive position (see Figure 2), and it will change the profile of the target customer. Gone are the days when customers were small and liked to pay a premium for a small piece of desired functionality. Instead, customers are increasing in number and demanding more functionality. All changes are the basis for the first wave of consolidation.

All competitors must at this point re-evaluate the viability and strength of their current competitive position against all other competitors, including any emerging PCs, for the goodness of their situation within the modified population of eligible competitive viable positions. This updated assessment should be used to enhance or revise a competitor’s competitive position in relation to its designated role. This is achieved by strengthening the company’s product strategy on some element of functionality or price, and / or by strengthening or expanding the markets it serves.

Shake-out & # 150; the later growth phase. During the latter part of the growth phase, the competition for the growing number of increasingly demanding customers can become so intense that no one is making money. This ignites a survival of the fittest shakeout, raising the competitive bar even higher. The strongest will have the strongest competitive positions in terms of functionality and / or price and / or markets served. They will also have the financial means to defend their positions against competitors who aggressively price products without regard to cost, and intruders with devious marketing messages and expensive campaigns that trick the customer into thinking they have the superior position.

Consolidators now work in overdrive to secure their place as a dominant competitor in the industry. This means that consolidators have to work overtime to see their consolidation goal achieved. Failure to do so could turn a small fish into a floating dead fish, as the consolidate’s solution is now not competitively priced and / or available as a feature of a product with a functionally superior position.

To the survivors, go the riches. Companies that survive the shakeout will clearly occupy different positions (see Figure 3) that offer a promise for profitability, and they will enjoy a reprieve in relentless price competition and costly hand-to-hand customer battles. However, this should not be seen as an invitation to become complacent for two consistent reasons. First, in anticipation of the inevitable leveling off of the growth that accompanies the mature phase of an industry, the survivors will have to work diligently to determine the company’s next new product / industry to ensure continued growth. to ensure. Second, survivors must support their stand against onlookers looking for openings arising from arrogance or apathy and the actions of other survivors who will soon become frustrated with the leveling off of growth and see a final round of consolidation as a means of generating income to buy. Beware. Consolidation is not a strategy to support growth in this case. You can consolidate adult A and B, but in the end you have adult AB, because the size of the world is constant. You can ask former HP CEO Carly Fiorina about the limits of consolidation as a growth strategy.

Conclusion. Only companies that can continuously establish and restore competitive positions valued by the inevitable consolidators, or create and strengthen the position of consolidator, or focus on profitable niche markets, will survive. You cannot avoid the underlying theme of consolidation that is constantly at work, as software administrators strive aggressively to implement strategies to ensure continued healthy living, compete with competition, and achieve 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 of Michael Porter (Competitive Advantage, 1980, The Free Press, NY). It is the sum of all companies that offer products that meet a comparable 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 made up of many different software industries, and why search engine software does not compete with computer-aided design software.

© 2005 Kathleen Brush,