Software Companies

The McKinsey Quarterly writes on the software business (the article is focused on turning around software companies):

Software is a winner-takes-all business in which three factorsthe need for compatible technology in networked environments, high switching costs, and increasing returns to scaleunite to ensure that only a small number of players in most market segments survive in the long run. SAP, the German provider of enterprise-resource-planning (ERP) software, illustrates the phenomenon: by the mid-1990s, it was such a clear leader in its market segment that it was able to claim, “We spend more on R&D than our competitors have revenues.” This winner-takes-all phenomenon favors companies as they race toward market leadership but exacerbates the difficulties of companies that fall on hard times. Switching costs, for example, are high because software is expensive to integrate into corporate IT systems; this hurts the losers because once a network has been configured around new software and employees have been trained to use it, the company isnt likely to switch to a vendor that might not be around to provide upgrades and service in years to come.

The article talks about the need to come up with new category killers, which are “products that will claim a market share of at least 30 percent.”

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Rajesh Jain

An Entrepreneur based in Mumbai, India.