The Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the Enterprise Software Applications Industry ORCL vs. SAP

1. The Complementarity of Industry-level vs.
Firm-level Factors Leading to Consolidation in
the Enterprise Software Applications Industry
Via fCh
May 2011, Strategic Management
______________

2. The What & Why
• Theoretical model as premise for testing industry
consolidation
• Exploring/exposing theoretical and methodological
linkages between industry and firm level factors
leading up to consolidation
• Mix of qualitative and quantitative methods
• Research opportunity associated with a natural
experiment

3. Theoretical angles
• Environmental munificence (Dess et al. 1984;
Castrogiovanni 1991)
• Industry shakeout (Agarwal 1998; Klepper &
Simons 2005)
• Dominant design
– Complementary assets (Tushman & Anderson 1986;
Rothaermel & Hill 2005);
– Platform economies (Evans, Hagiu & Schmalensee
2006)

4. Industry facts
• 300 publicly traded
enterprise software firms in
1997, 111 in 2006
(Cusumano 2008)
• Growing revenues
($253.7Bn in 2011),
increasing concentration (3 The evolution of the number of publicly traded
firms control 43% of the enterprise software applications firms listed on the
US capital markets
market)

5. Hypothesized factors leading to industry consolidation
• Y2K (Jacobs & Weston 2007; Cusumano 2008)
• “.com” Crash, March 11, 2000 ((Jacobs & Weston 2007;
Cusumano 2008)
• The diffusion of free and open source software
(Cusumano 2008)
• The increase contribution of services to firms’ revenue
(Cusumano 2008)

6. More industry facts
• ERP has a modular
architecture
– Its benefits are realized
when the modules are
integrated (Markus et al.
2000)
– The more modules the more
risk of implementation
failure (Davenport 1998) “At the heart of an enterprise system is a central
database that draws data from and feeds data into a
– Failure rate in ERP series of applications supporting diverse company
functions. Using a single database dramatically
implementation 40-60% streamlines the flow of information throughout a
business” (Davenport 1998).

7. Theory Supported Hypotheses
• H1: Sudden decrease in environment
munificence leads to industry shakeout
(Utterback & Suarez 1993; Klepper & Simons
2005)
• H2: The dominant design emerges as result of
platform economies—scale, scope, and skill
(Teece 1986; Rothaermel & Hill 2005; Evans et
al. 2007)

8. Illustration of the dominant design
As of 2005, Oracle has
spent more than $50Bn on
acquiring more than 50
companies
•Platform economies
•Absorptive capacity
•Signaling
•Lock-in effects / Barriers
of entry

9. Analytical hypothesis
H3: The market tends to settle
towards the Bertrand
equilibrium (marginal cost
of the most efficient player’s
marginal cost, provided that
there is no collusion)
Market equilibrium under imperfect competition can occur at many points on the demand curve. In this figure, which assumes
that marginal costs are constant over all output ranges, the equilibrium of the Bertrand game occurs at point C, also
corresponding to the perfectly competitive outcome. The perfect-cartel outcome occurs at point M, also corresponding to the
monopoly outcome. Many solutions may occur between points M and C, depending on the specific assumptions made about
how firms compete. For example, the equilibrium of the Cournot game might occur at a point such as A. The deadweight loss
given by the shaded triangle is increasing as one moves from point C to M.

10. Q&A
Thank You!