The European e-Business Report The European e ... - empirica

The European E-Business Report 2005
2.10.4 Anticipated implications of e-business for the industry
The second sector report (of September 2005) assessed the implications of ICT and e-business
adoption on the structure of the IT services industry. It applied the 'five-forces-model' developed by
Michael E. Porter (1980) as a framework to do so. This chapter summarises the main findings.
New entrants
In general, barriers to entry are low in most IT services segments. Setting up shop in software
development and consulting requires only labour, knowledge and a basic ICT infrastructure as major
inputs. Therefore, only limited resources are needed for establishing an IT services business. As a
consequence, most companies are small: more than 90% of companies active in this sector are micro
enterprises. The internet makes it even easier for small companies to enter the markets, as it
decreases costs for obtaining information as well as for marketing and communicating even to distant
(potential) customers.
Moreover, new e-business developments are likely to even further facilitate market entry by new
players and thus to increase competition in this sector. In fact in past years nearly every new
technological trend, e.g. the provision of centrally hosted software applications via the internet (ASP),
was accompanied by a large number of new players entering the market and trying to establish a
business in this new niche. Although many of them disappeared only shortly afterwards, some
survived and increased competitive pressure in the IT services market.
Substitution of products and services
In Porter's model, substitutes refer to products or services in other industries. From an economist’s
view, a threat of substitutes exists when a product's demand is affected by the price change of a
substitute product. From this perspective, there are no serious threats of substitutes if the entire IT
services sector is considered. Simply spoken, investments in new ICT or e-business technologies
cannot be substituted by services or products supplied by other industries.
A threat of substitutes, however, is of importance within different sub-segments of IT services,
particularly in the software development market. Open source based software products, for example,
are increasingly becoming serious alternatives to conventional software. In addition, customers can
choose between different types of software provision. They may, for example, install solutions
internally or use centrally hosted applications provided via the internet by ASPs or B2B internet trading
platforms. Hence, ICT and e-business tools are essential for establishing open source or ASP
businesses as alternatives to conventional software.
Negotiation power of suppliers
Main inputs to IT services, apart from labour and knowledge, are products and services delivered by
other IT services companies (e.g. software development and hosting services). The 2005 survey
results have shown that a large share of IT services companies are outsourcing IT services to other
providers. However, the negotiation power of IT outsourcing providers is limited, as a large number of
competing companies offer outsourcing services today – especially if it comes to basic commodity
services. In addition, the establishment of offshore IT outsourcing businesses in Eastern Europe is
likely to intensify competition among outsourcing service providers and, thus, to diminish their
negotiation power.
However, the impact of e-business technologies on the negotiation power of suppliers is relatively low.
The main implication is that the internet has contributed to a higher transparency of prices and, in this
way, slightly lowered the suppliers’ negotiation power. Thus, IT services companies using the internet
for procurement activities may profit from a stronger position. They could (at least in theory) further
exploit their purchasing power by using online negotiation tools (e.g. online auctions). However,
specific IT solutions likely to further exploit the strong position of IT services companies towards their
suppliers (e.g. online auctions) are only of minor importance in this sector.
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