4.4 Industry Profile
Since dominant economic characteristics of an industry have a direct relationship with strategy, here we portray the profile of the software industry of Bangladesh.
Market Size: The present size of the domestic ICT (Information and Communications Technology) market is worth Tk 1,100 crore a year and the local software market volume in 2005 was more than Tk 300 crore (according to an estimate of BASIS) increasing at a rate of more than 20%. The rest share of the market belongs to computer and network hardware business.
Over 50 software and IT service companies are exporting their services to 30 countries in the world including US, Canada, Europe, Middle East, Japan, Australia, South Africa and some South East Asian countries. The country fetched a total of US$ 127 million in exports of software and IT enabled services during July-January period of fiscal year 2005-06 as against US$ 7.42 million in the same period of previous fiscal (source: EPB ).
Figure 1: Software Export of Bangladesh
Source: Bangladesh Bank, export remittance statistics
Market growth rate: More than 20% for domestic market and 75% for export market in FY2005.
No. of companies in industry: Nearly 450 software and ITES firms are operating in Bangladesh. Among them 216 companies are members of BASIS.
Scope of competitive rivalry: Primarily within the country. Competition outside the country is not fierce because of huge opportunity in contrast to current export.
Stage in life-cycle: Early growth.
Customers: The basic clientele for the software firms are usually the business organizations or institutional market. Business organizations include both large enterprises and SMEs (Small and Medium Enterprise) like manufacturing, marketing, telecommunication, furniture, wholesale and retail stores etc. Recently a few companies have been developing multimedia software (entertainment and education) for consumer market.
Degree of vertical integration: Most of the companies have forward and backward integration, since they develop the basic component modules for the final software product and distribute final product through their own channel. A few companies market foreign and local software products as marketing partner or distributor.
Ease of entry/exit: Entry barrier is moderate due to lower capital requirement, difficulty in building a relationship network and a profitable customer base within a competitive industry, moderately high switching cost of customers and difficulty of economies of scale through standardization and people skill. Exit barrier is moderately low. Both entry and exit barriers are comparatively low for companies that mainly market foreign products as marketing partner or distributors due to lack of regulatory implementations.
Technology/innovation: Technology is changing at a very fast pace. Processor speed doubles in almost every 18 months according to Moore’s Law since 80s, hence hardware and network technology evolve continuously. Generations of operating systems and programming languages come much faster than average business software life-cycle of five years.
Product characteristics: Mixed – both standardized products (accounting, inventory, supply chain etc.) and customizable products (garments management etc.). For standardized products quality differs among companies in terms of fulfilling business needs and built-in customization facility for special business needs.
Economies of scale: Mixed. Companies marketing standardized product enjoy lower cost than other companies due to higher customer coverage.
Learning and experience effect: Very high.
Industry profitability: Price war is significant for low-end and medium-end products. Only companies having much experience and good relationship network with high quality products enjoy relatively higher-price market segments. The rate of return from the investment in the sector is long-term – usually the typical pay back period from investment in any software project is more than five years.
The high-technology and knowledge-intensive software sector has a two-tier structure with the larger competitive firms holding the majority of government and larger institution market. There are also a large number of smaller firms producing for the local niche markets. Competition among smaller firms takes place in terms of relationship network, price, cost efficiency and quality. The larger firms, investing heavily in R&D to develop new products enjoy considerable market power and compete mainly on the basis of marketing and innovation rather than price. Overall, the sector is fairly competitive.
4.3 Industry Competitive Forces
• The Rivalry among Competing Sellers: Mixed. The software industry is mostly fragmented and the competition is moderately high in domestic market but somewhat weak internationally. The competition within the industry is strong in the standardized product segment (accounting, human resource, ERP etc.) and relatively weaker in the customized segment. Since the local market is rapidly expanding with a growth rate of more than 20% and foreign market demand is also increasing with a growth of 75% in FY2005, every company has the opportunity to grow. Switching cost is relatively higher for specialized products as it involves time and training investment on human resource. Exit barrier is relatively low due to lower capital investment.
• Availability of Substitute Products: Moderate. One of the competitive substitutes is not using software at all, i.e., working with manual process. Awareness level is low, even close to nil in the SME segment.
• Potential Entry of New Competitors: Moderate due to economies of scale, medium entry barrier, relationship marketing, higher switching cost and congenial legal environment considering its future prospect.
• Bargaining power of Suppliers: Moderately low. There are a number of suppliers including marketers of cheap foreign products. The buyers do not perceive the importance of automation in their business success and they judge mainly on price and service.
• Bargaining power of Buyers: Fair. The industry is scattered and buyers are not aware of software products or well informed about the sellers. Often SME buyers simply hire consultants or develop IT teams for developing their own solutions.
Complementors/Collaborators: Hardware, Internet and telecommunication sectors enjoy high growth due to deregulation friendly legal environment. Though basic hardware is not produced locally, local sectors achieved the capability for installing equipments and providing high quality of service.
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