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Management and the Business Environment

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Abstract

Porter’s Diamond Model analysis reveals that all the important factors used in the assessment of a nations’ competitiveness in the global business, seem to indicate a positive score for India in both the embedded software as well as the robotics field. Industry friendly polices by government, continuously available pool of high quality IT professionals, world class IT research centers and flexible organizational culture have all contributed to this growth. Tax exceptions and infrastructural provisions made possible by the establishment of the Small Economic Zones across the country have greatly boosted industrial growth.

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Porter Diamond analysis of the Indian software and embedded robotics sectors clearly suggests India’s high competitive stature in these industries. ABC Ltd should invest in India to capitalize on these advantages.

Introduction

International competition at the firm level has been extensively studied by economists and there are scores of literature. However, there is a distinct lack of economic theory pertaining to international competition at the country level. Since Adam Smiths theory of absolute advantage in the nineteenth century, there has been so much research into international trade theories. There followed the theory of comparative advantage by David Ricardo. Porter in 1990 proposed his new theory to explain the competitive advantage of nations in what is now familiarly known as the Porters National Diamond theory. Porter includes four national attributes that determine the competitive advantage of countries. These are ‘Factor Conditions’ , ‘Demand Conditions’, ‘Related and Supporting Industries’, ‘Firm strategy structure and rivalry’. (Smit, 2010) Porter’s model also includes two exogenous factors namely government policy and chance. Porter’s competitiveness model though not widely accepted by economic theorists is much researched by management researchers. Porter’s Diamond model is used as a tool to analyze the existing home based advantages and how companies could exploit these factors at the global level. (Rugman & Verbeke, 1993) Porter’s model could also be used to assess the scope and potential profitability in expansion of businesses overseas. This would aid in the investment plans of multinational corporations in the global business arena. Managerial researchers advice merging SWOT analysis along with Porter’s diamond analysis to analyze the competitiveness level. This paper applies Porter’s diamond model to assess the prospects of Indian Software industry in order to advice on the investment climate and the growth potential for American Robotics and embedded software company ABC Ltd.

ABC Ltd. (The Company)

ABC Ltd , is a company focusing on semi autonomous robotic devices useful in household applications such as vacuuming and cleaning services and providing embedded software solutions to a variety of clients in America. The company is looking to increase its market share by entering India attracted by its cheaper and high quality chip designing facilities as well as the rapidly growing embedded software market. The company not only plans to leverage the cost and production efficiencies that India offers but also to use the rapidly growing Indian middle class population as a target for its advanced and semi autonomous cleaning and vacuuming robots. With the current 50 million middle class Indian population slated to swell into more than 550 million people by 2025, entering the Indian market at this time would create a vast customer base for its home based robotic products. (ACMA, 2011) Particularly, since there is not much competition for its robotic products in the country, ABC Ltd would gain the advantages of being the early entrant into the market.

The thriving Indian economy would boost its business prospects enormously. Furthermore, the cost effective design solutions from India could help the company greatly reduce its product costs which would give comparative advantage for the products in America. With a proposed contract from the American government for its surveillance robots, the company might need to make its business process efficient and the Indian venture would fulfill that objective. Currently only looking to establish a design laboratory and a software company for its embedded software solutions, the company is also planning future expansion into a total assembly unit for its robotics division in Bangalore which is the IT hub of India. Since India is flourishing in software and since the country presents immense scope for the growth of robotics and embedded electronics, the company decided to analyze the business climate further. The management wanted to perform the Porter’s Diamond model analysis of India with respect to the software and electronics industry before actually venturing into the country. The following discussion is centered on a brief analysis of the competitive ability of Indian software and electronics industry in the global arena.

Indian Software Industry

Indian software industry is undoubtedly one of the successful industries that capitalized on the market opportunities that globalization offered. Some of the Indian Software giants such as Wipro, Infosys, and TCS have carved niche markets across the world securing multi million dollar contracts with a growing list of western clientele. Over the past decade or so the success story of the Indian software sector has attracted investments from major western software firms such as Microsoft, IBM , Cognizant technologies, Accenture etc. that have heavily invested in India as a source of their software design and development. The cost effective and high talent pool of Indian employee population has contributed to this remarkable success story of the software industry in India.

Porter’s Diamond model framework describes the six attributes that contribute to the competitive advantage of a nation in any particular industry. These six attributes that were described above would be further explored in context of the Indian software industry. This would provide ABC ltd, an American software and robotics firm which is actively exploring the option of making a significant investment in India to develop an embedded software and robotics firm in the country. The following diagram illustrates the Porter’s Diamond model of assessing international competitiveness (Huang, 2011).

Factor Conditions

Factor conditions represent those factors that improve production in a country. These might include labor supply, resource or raw material supply, arable land, linguistic skill set of labors, Infrastructure, Knowledge base, etc. These factors are further classified into basic factors and advanced factors. According to Porter, the differences in nature and availability of these factor conditions that affect productivity give rise to competitive advantage to some nations over other. For instance the US being a huge country with vast arable lands is a big exporter of agricultural products across the world. On the other hand countries such as Japan which do not have such arable land depend mostly on exports of machinery and electronics goods.

As a rising global economy Indian infrastructure is steadily improving over the last decade and it already has a very sophisticated digital and mobile communication infrastructure. Already 4G services are launched in the country. Furthermore, the highly qualified talent pool with computer degrees and research in computer applications gives it a distinct advantage in the advanced factors. The large pool of electronics and communication engineers in India is under utilized since there is a dearth of electronics industry in the country. However for ABC, Ltd this would mean the availability of electronics and telecommunication engineers for its new planned expansion of the robotics division. This, as porter says, gives India a distinct advantage in the advanced factors condition. (Porter, 1990) India currently ranks first in terms of the youngest population in the world with over 70% of the Indian population below thirty five years of age and more than 35% below 15. (Dyson, 2004) This assures a steady stream of talented workforce.

Demand Conditions

Another important factor ascribed by porter in the evaluation of a nation’s competitiveness is its domestic demand. Investors are attracted to a country not just because of its position as a low cost production center but also because of the surge in local demand for the products. In India the electronics and robotics sector is growing at a steady pace currently but the growth is projected to be more than 10 times in the next 8 years. The statistics from a recent government report suggests the demand for electronic goods in India is slated to grow from $20 Billion in 2009 to $100 billion in 2020. (GOI, 2011) Therefore there is a large projected home demand for electronic goods in India. Similarly the market for IT products and services is slated to reach at least US$41.2bn by 2015. (MarketResearch, 2011) The demand for IT personnel is such that large companies retain significant bench strength so they can allot personnel to new projects as and when they start. Big firms such as Microsoft also participate with many universities across India. The company’s I-Spark program is designed to boost entrepreneurship and innovation among students. (Microsoft, 2011) So both the software and the electronics sector are poised for high growth in the years ahead.

Related and Supporting Industries

The inclusion of the growth and the competitiveness of the supporting industries has a compounding effect on any industry. (Teece 1996) For the software sector, the semiconductor industry, computer hardware industry, the broadband infrastructure and computer academics are the related industries. These clusters impact the competition. (Porter, 1998) Though there is no chip development unit in India, Indian chip designers are far advanced than China and many big chip companies such as Intel, AMD and TI have moved most of their designing services to India making the country one of the largest chip designing facilities in the world. By 2013 the Indian chip designing services is slated to touch $10.2 billion. (Thomas, 2011) The broadband infrastructure in India is also rapidly developing making the country one of the best in the world in terms of internet connectivity. The recent rollout of very high speed 4G wireless internet services by Airtel, one of the leading broadband service providers of the country, is suggestive of the penetration of advanced communication services across the country. (Krishna, 2012) Furthermore the IT academic sector is also expanding fast in India with the premium research institutes such as the International institute of Information technology (IIIT) at Bangalore and several Indian institutes of technology (IIT) branches across the country offering advanced research and PhD programs in IT. At the school level too ICT is integrated into the curriculum. Therefore the combination of the growth factors of the related and supporting industries in India is adding to the competitive advantage of India as a nation in the global IT market.

Firm Strategy, Structure and Rivalry

This is another of Porter’s factors that could impact the competitiveness of a nation or an industry within the country. Firm structure, organization and culture maybe different in different countries and each structure has its own advantages and disadvantages. While many production companies follow the traditional hierarchical structure many other new and knowledge based firms have changed over to flat, team based and organic structures. (Amri et.al, 2010) Team based culture promotes employee participation and increased employee participation is viewed as the key to improve organizational productivity. (Perry et.al, 2006) In India most of software organizations have evolved into flat structures with young management. Indian software companies have an informal culture which is at the same time professionally managed. There is stress on optimizing productivity, improving efficiency and delivering products on time (Arora et.al, 2001).

Chance events and Government Policies

Chance events describe those events that are out of control and not natural to the environment of a country. Anything from rapidly fluctuation exchange rates, political instability, war, terror attacks, natural calamities such as earthquakes, tsunami, etc are chance events which affect the business competitiveness of an economy. Government policies have a significant impact on the other attributes of the Porter’s diamond model. For instance government policies can create a conducive environment for the growth of software exports or may deter the same. Particularly, tax policies, financial regulations including FDI permit and anti trust laws impact the competitiveness of a country. (Porter, 1990) Indian government polices facilitate software exports. The establishment of the Special Economic Zones (SEZ’s) in different states across the country is considered one of the important policy decisions by the Indian government that created a huge boost in the software exports sector in the country with the rapid entry of several multinational companies availing the industry friendly policies, incentives, and international level infrastructural facilities that were provide at these Special economic Zones. Some of these incentives include 100% exemption from income tax from the accrued profits for the first 5 years, total exemption of sales tax, services tax and a single window approval, SEZ companies permitted external borrowing of up to $500 million per year, etc. (GOI, 2009)

The factors conditions, demand conditions, related industry support as well as the firm structure and strategy are all very attractive in India. The brief analysis of these factors along with the exogenous factors of chance and Government policies suggests that India scores well in the national competitive scale in the software industry. The analysis also indicated that the growth is projected to continue in the upward direction for many more years to come. With the recent Indian government stance of accepting even 100% FDI in many sectors the promise of economic growth in the country is immense. The demand for software products both internally as well as the export market are expected to increase tremendously. Previous studies including Porter’s diamond analysis have also attested to India being the choice destination for the software industry. (Kogut 1997) To sum it up we could say that India fairs well on all the factors of the Porters Diamond model of assessing national competitiveness.

Conclusion

The software market in India is ripe and continues to grow at an alarming pace. The robotics and embedded electronics industry on the other hand, though in the early stages of development, is also expected to grow rapidly in the next few years. As the Porter’s Diamond Model analysis reveals, all the important factors that are used in the assessment of a nations’ competitiveness in the global business, seem to indicate a positive score for India in both the embedded software as well as the robotics field. Many reasons are attributed for this success of India. Industry friendly polices by government, continuously available pool of high quality IT professionals, world class IT research centers and flexible organizational culture have all contributed to this growth. Tax exceptions and infrastructural provisions made possible by the establishment of the SEZ’s across the country have greatly boosted industrial growth. Excellent telecommunication infrastructure and the availability of high speed 4G internet services will further propel the growth of the hardware and software industry in the country. ABC Ltd which is focusing on cost cutting and process optimization for its embedded robotics division would be greatly benefitted by launching its Indian operations as early as possible. Besides the cost effective service exports that are possible from the proposed Indian base, the company could also tap into the surging middle class market for its home appliance robots. In conclusion we can say that the Porter Diamond analysis of the Indian software and embedded robotics sectors clearly suggests India’s high competitive stature in these industries. ABC Ltd should invest in India to capitalize on these advantages.

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