Three firms control now 43% of the enterprise software applications market, whose growing revenue is projected by Gartner to surpass $253.7 billion in 2011.[1] This level of industry concentration is part of an ongoing trend that characterizes the declining stage in an industry lifecycle model (Porter 1980). As such, the research opportunity is to build a formal model to explain the industry factors leading up to such high levels of concentration, while being able to capture firm level strategies as well. Moreover, given the magnitude of change in a relatively short period of time in this industry, the transformation that is still going on makes for a quasi-natural experiment, whereby the researcher can test theory driven hypotheses.
It is my objective in undertaking this work to build a testable model that answers the following research question: What are the industry-level vs. firm-level factors leading to industry consolidation in the enterprise software applications industry? The immediate contribution would be to establish conceptual and methodological linkages between industry and firm level factors leading up to consolidation higher concentration. In other words, a potential contribution is to expose the often-ignored ‘conduct’ part in the structure-conduct-performance paradigm. At a later stage, the model is to be tested not only on the focal industry herein, but also on other industries.
The industry level working hypothesis is that a significant decrease in environmental munificence triggers both the emergence of a dominant design, and a shakeout in the industry (Utterback et al. 1993; Klepper et al. 2005). The emerging dominant design in the enterprise software industry realizes platform economies—of scale, scope and skill—by vertically integrating complementary assets (Teece 1986; Rothaermel et al. 2005). The formal model suggests that the enterprise software applications market tends to settle towards the Bertrand equilibrium around the marginal cost of the most efficient player.
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