Indian Software Success Story:

A Resource-Based View
of Competitive Advantages
Pankaj M Madhani*

India has achieved remarkable success in the software industry. Software

accounts for 25 percent of the total Indian export. The purpose of this paper
is to discuss the resources, including technical skills and cost competency, that
have contributed to the competitive position of the Indian software industry.
In accordance with the Resource-Based View (RBV), the main source of the
market performances of a range of firms lies on the specific nature of their
resources and their accumulated competences. This paper discusses the Indian
software industry and its resources and analyzes the case using the RBV of
strategy. The paper discusses the Indian software industry's growth drivers
in terms of resources. It also underlines emerging challenges for the Indian
Software Industry and proposes the Dynamic Resource-Based Model.

Introduction
The purpose of this paper is to discuss the resources, including technical skills
and cost competency, that have contributed to the competitive position of the
Indian software industry. Here, a detailed discussion of the Indian software
industry and its resources is presented and the case analyzed, using a
Resource-Based View (RBV) of the competitive advantages. In accordance with
the RBV, the main source of the market performance of a range of firms lies on
the specific nature of their resources and their accumulated competences. A firm
with a competitive advantage excels in time, quality, or cost, or a combination
of such, over its competitors. A combination of resources, including supportive
government policies, skilled workforce, sound infrastructure, global linkages and
first mover advantage, etc., helps to create a sustainable advantage for the
Indian software industry. RBV helps to explain the contribution of various
resources to the Indian software industry. The paper begins with a case study
of the Indian software industry, followed by an analysis of the case using the
RBV of strategy.

Literature Review
Over the last few years, RBV has gained much influence in strategy. This approach
results from several research streams, notably economic theory and strategic
* Assistant Professor, The Icfai Business School, Ahmedabad, India.
E-mail: pmmadhani@yahoo.com

© 2008 The Icfai University Press. All Rights Reserved.

Indian Software Success Story: 61
A Resource-Based View of Competitive Advantages

Electronic copy available at: http://ssrn.com/abstract=1200105

management. Its roots go back to the 1950s, with the work of Penrose in 1959.
Edith Penrose (1959) provided initial insights into the resource perspective of the
firm and contributed with the formulation of important concepts, such as:
a firm can be seen as a collection of resources; the path of growth of a certain
firm can be optimized, requiring the combination of internal as well as external
resources in a particular sequence; and the process of growth of a firm is
dependent on management, its acquired experience and its learning capability
(Rugman and Verbeke, 2002). Many researchers have contributed to its
development. The author believes that RBV helps explain and deduce the
contribution of various resources to the Indian software industry. This analysis
of competitive advantage is based on the unique resources that a firm possesses.
To the extent that a competitor cannot create or substitute for these resources,
they provide a unique advantage to the firm that owns them. Yet, resource
advantage may not be sufficient—the firm needs to possess distinctive capabilities
to make better use of its resources (Penrose, 1959).

However, RBV was put forward by Wernerfelt (1984) and subsequently

popularized by Barney (1991). Resource-based thinking considers that a
company’s resources include all assets, organizational characteristics, processes,
aptitudes, information and knowledge controlled by that company and its
employees (Barney, 1991). The RBV of the firm (Barney, 1991; Mahoney and
Pandian, 1992; and Amit and Schoemaker, 1993) states that internal resources
and capabilities of a firm are the basis for creating sustainable competitive
advantage. This is achieved by the accumulation and use of resources and
capabilities that build unique, inimitable and non-substitutable competencies.

According to the RBV, competitive advantages are achieved through the

ownership of scarce and valuable resources, which are fundamental determinant
of competitive advantages. A resource is valuable when its use helps in exploiting
specific opportunities. A firm’s competencies stem from its ability to reconfigure
and exploit its assets in such a way that it attains a competitive advantage. These
competencies derive from practical and theoretical knowledge acquired through
experience and formal learning. In the RBV approach, resources are distributed
in a heterogeneous way among the nations, within certain industries, as a result
of different paths (path dependency) followed by firms and their governments.
Since some resources are difficult to acquire or substitute, there is potential for
the establishment of competitive advantages that create a superior and
sustainable financial and market performance, until rival companies across the
border obtain a set of equivalent resources (Barney, 1991). In the RBV, resources
and competences are assets, capabilities, organizational processes, attributes,
information, knowledge, etc., controlled by the firm, that may lead to the
improvement of its efficiency and effectiveness (Barney, 1991).

These resources and competences can be used to create and implement

strategies. To have the potential that makes possible a sustainable competitive
advantage, a resource should possess the following attributes: it needs to be
valuable, in the sense that it can allow the company to take advantage of
opportunities and to neutralize present threats in the competitive arena; it needs

62 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

Electronic copy available at: http://ssrn.com/abstract=1200105

to be rare among the current and potential rivals; it should not be perfectly
imitable, i.e., it should be non-perfectly imitable; and it cannot have strategically
equivalent substitutes that are valuable, but are not rare or imitable
(Barney, 1991). Non-perfectly imitable resources can be originated by any
combination of the three reasons: (1) the ability of the firm to obtain the resource
is dependent on unique historical conditions of its development (path
dependency); (2) the connection between the possessed resources and the
sustainable competitive advantage has an ambiguous causality; and (3) the
generating resource of the sustainable competitive advantage is socially complex
(Barney, 1991).

Pettigrew and Whipp (1993) argue that the competitive performance does not
depend just on the characteristics of the firm or the utilized technology, but also
on a combination of a set of abilities and modes of action. Usually, the success
of companies has been attributed to the capability of creating competitive
advantages that allow them to distinguish themselves from their rivals, to
generate superior positive economic rents, and to sustain those differentials in
a long lasting way (Pfeffer, 1994). Jarvenpaa and Leidner (1998) have used this
theory to analyze the case of a firm in Mexico, a developing country. Entering
the 1990s, the highly dynamic business environment challenged the original
propositions of the RBV as being static and neglecting the influence of market
dynamism (Eisenhardt and Martin 2000; and Priem and Butler 2001).
Many authors (Eisenhardt and Martin, 2000; Priem and Butler, 2001; Zahra and
George, 2002; Zollo and Winter, 2002; and Winter, 2003) have made significant
contribution to its conceptual development. The essence of the RBV lies in the
emphasis on resources and capabilities as the genesis of competitive advantage.
Wade and Hulland (2004) have reviewed the RBV and information systems
research.

The Indian Software Industry at a Glance

From being a mere $2 bn industry in 1994-95, the Indian IT and ITES industry
has grown phenomenally over the years. It recorded a 30.7 percent growth last
year (2006-07), clocking in revenues of $39.6 bn. In 1996, it accounted for a mere
5 percent of the total Indian export, but today it has jumped to 25 percent. Indian
IT and ITES sector is confident of achieving the US$ 80 bn in annual revenue by
2010, from the expected value of $50 bn in 2007-08. It would add 7 percent to
India’s GDP by 2010, from the present level of 5.4 percent. The growth of the
Indian software industry has been a phenomenal success when measured
against standard indicators, such as growth in sales, employment and exports,
and especially when contrasted with the performance of other industrial sectors
in India. By 2008, India’s software industry will employ four million people and
account for 8 percent of the GDP and 30 percent of the total foreign exchange
earnings. The particular strength of Indian firms was their ability to assemble
teams of talented engineers and programmers and deliver a technical and
cost-efficient outsourced service to diverse customers anywhere in the world.

Indian Software Success Story: 63

A Resource-Based View of Competitive Advantages
 Figure 1: Growth of Indian Software Industry

The Growth of Software Revenues in India, 1993-2007

40.00

Exports Total

30.00 $ Bns
Software
Revenue
20.00

10.00

0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Exports 0.33 0.49 0.73 1.09 1.76 2.60 3.96 6.22 7.65 9.88 12.90 17.70 23.60 31.30
Total 0.56 0.84 1.22 1.76 2.94 4.01 5.54 8.30 9.96 12.46 16.70 22.60 30.30 39.70

Year

Source: NASSCOM.

They also leveraged their capabilities for maximum economic value through the
adaptation and perfection of a new business model. Figure 1 highlights the
growth of the Indian software industry.

As of December 2006, over 400 Indian companies have acquired quality

certifications, with 82 companies certified at SEI CMM Level 5—higher than any
other country in the world. The NASSCOM-CRISIL report titled “The Rising
Tide— Output and Employment Linkages of IT-ITES” says that every rupee spent
by the IT-ITES sector (on domestically-sourced goods and services) translates to
a total output of Rs. 2 in the economy. And for every job that is created in this
sector, four jobs are created in the rest of the economy. According to the study,
exports by the IT-ITES industry would cross $31 bn in the current calendar year
and top $60 bn in 2010, by which time the jobs created by the industry would
jump from around 8 million to around 11.5 million.

An interesting aspect of the history of outsourcing is that the factors that were
crucial to the emergence of outsourced software exports from India were quite
distinct from the factors that sustained the competitive edge of Indian software
firms, and hence the growth of the industry overtime. For example, while
abundant (and cheap) human capital was the basis of India’s early software
exports, the growth in software exports was based on improved productivity of
the industry. Here it may be argued that this improved productivity was due to
the development by the Indian firms of dynamic capabilities, which enabled them
to use changing economic opportunities to carve out a niche in the export of
outsourced services. The main advantage enjoyed by the Indian software firms
initially was the cost advantage of cheap engineering talent. But, gradually, the
leading Indian firms possessed unique capabilities in outsourcing, across a range
of services, to large multinational clients.

64 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

 Several important features of India’s software growth are discernible here.
First, export sales have been crucial to the rise in industry revenues. More than
two-thirds of the software industry’s sales were due to export sales. The basic
value proposition and capability that prevailed was the ability to deliver a working
team of software professionals, capable of undertaking any software engineering
job, to any part of the world. Designed to overcome infrastructural constraints
imposed by poor access to telecommunications, exporters could register with their
regional STP (Software Technology Park) for satellite links and operate via the
web, for a fraction of what it would have cost them to have their own dedicated
lines. This dramatically decreased the cost of telecommunication access and
increased its coverage, so that offshore operations came within the reach even
of smaller firms.

The large-scale outsourced business model demands certain complementary

organizational capabilities: the ability to scale up quickly in response to growth
in demand; the human resource management capability; the software process
management capabilities (to ensure fewer errors and greater reliability of the
service product); and lastly, given that customers are largely overseas, the ability
to manage global operations. Indeed, the offshore business model would not
have succeeded without these parallel organizational capabilities. Indian firms
have been operating mostly at the lower end of the software value ladder—at
the programming/maintenance services.

History of Outsourcing
Basically, an organization can get its information systems from two sources—
internally, from its own IT department, or externally, through outsourcing (McFarlan
and Nolan, 1995; and Aubert et al., 1996). In-house provision is often seen as the
best way to provide an organization with IT services that are well adapted to
support its business activities, while preserving its trademark processes and
know-how (Chesbrough and Teece, 1996). On the other hand, in-house provision
has also been described as excessively expensive, anachronistic and inefficient
(Huber, 1993; and Fields, 1995). Internal IT projects are notorious for being long,
late and over budget (The Standish Group, 1995; Rockart et al., 1996; and Keil et
al., 1998). Moreover, they are also said to distract a company from its core business
by draining scarce resources to accomplish an allegedly marginal activity.

As reported by Earl (1996), critics of in-house development argue that a better

solution is to outsource those IT activities to specialists, thus permitting the
company to focus on its core business. The presumption underlining this argument
is that specialists are better equipped to take advantage of economies of scale,
while offering access to the best IT development practices. The resultant savings
should eventually translate to more cost-effective IT services for the firm
(Gupta and Gupta, 1992; Fields, 1995; and Elmuti et al., 1998). Since the early
1990s, the outsourcing approach has gained both in popularity and in importance
to the point that in some companies, the entire IT function has been outsourced
(Loh and Venkatraman, 1992; and Grover et al., 1994).

Indian Software Success Story: 65

A Resource-Based View of Competitive Advantages
RBV of the IT Outsourcings Model
Outsourcing can be described as the contracting out of the company’s major
functions and activities to an external service or goods provider. From an RBV,
the less the necessary resources are present within the firm, the more the firm
will seek to overcome this weakness by calling upon external expertise.
Conversely, the more the necessary resources are present, the more the firm will
seek to boost and exploit this expertise to gain a competitive advantage
(Prahalad and Hamel, 1990). On the other hand, the lower the strategic value
of these resources, the more the company is justified in parting with them and
in relying on outsourcing. Keeping assets with a low strategic value would
monopolize resources that could be put to better use elsewhere. Consequently,
interactions between these two factors—‘Strategic Value’ and ‘Presence of
Appropriate Resources’—should have a foreseeable impact on the sourcing mode.
These potential effects are represented in Figure 2.

Figure 2: The IT Outsourcings Model

H

X = Preferred Block of
Value

Outsourching
Strategic

X
L

L Presence of Appropriate Resources H

When to Outsource
In the scenario where the ‘Strategic Value’ is low and the ‘Presence of Appropriate
Resources’ is also low, the sensible choice would be to outsource the future
development of the IT system and services to a supplier. Under these
circumstances, there would be no rationale to invest time and scarce resources
to acquire competencies that would only be used in a non-core project. Typically,
the company would hire an IT expert/consultant to develop its information system.
In its most extreme form, a company can outsource its whole information system
development function.

66 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

Literature Review on Success Factors
for Software Exporting Nations
Researchers and policy makers have had a long fascination with the question as
to why a certain national industry succeeds: what led to success, what factors
will keep it successful, and what prescriptive factors can be gleaned for other
nations (as surveyed in Porter, 1990). Traditionally, economists have explained
an industry’s success in macroeconomic terms, interest rates, exchanges rates,
cheap labor, abundant natural resources, government policy, and intervention in
the marketplace, or by national advantages in management practices and
labor-management relations. An important milestone in this regard was Michael
Porter’s (1990) model of competitive advantage of nations that posits four critical
factors for a national industry not only to be able to export, but also to achieve
global leadership over an extended time period.

Still more recent is the focus on success models for nations’ software exports.
A World Bank report (Garry, 1999) categorized important new software nations
according to four criteria (with the respective nations in parentheses): cost
(China); English-speaking ability (Singapore, Ireland); ease of doing business
(Ireland, Israel, India, Singapore); and segment expertise (India). Perhaps, the
most comprehensive model, to this point, for evaluating national software export
industries, is the Software Export Success Model proposed by Heeks and
Nicholson (2002). This model has already been applied to a number of new
software exporting nations (Bruell, 2003; Gengler, 2003; and Nicholson and
Sahay, 2003).

RBV of the Indian Software Industry

The ‘Resource Based Model’ is used here as a base to incorporate success factors
that lead Indian software industries to remarkable success. With the remarkable
success of India’s software industry, policymakers and industry leaders in scores
of developing nations are attempting to model their own software exporting
industries. The eight major factors that lead to Indian software export success
are synthesized and summarized here. This synthesis is captured into an RBV
Model. The model is useful in order to look back and explain the success of the
Indian software industry. The model is also useful as a framework for prescriptive
policies and strategies to be taken by other nations in order to improve their
position in this arena.

The eight factors identified are:

1. Human capital, including quantity, composition, language skills,

managerial and technical skills;

2. Wages/Cost advantages;

3. Government policy, support and vision;

Indian Software Success Story: 67

A Resource-Based View of Competitive Advantages
 4. Strong quality focus;

5. Industry characteristics, including clustering effects, the number of firms,

their size, the associations or body which represents the industry’s firms,
the industry’s degree of common vision and branding, and the standards
that the firms aspire for;

6. Capital;

7. Project/Technological infrastructure; and

8. Linkages, including linguistic linkages, diaspora linkages and time-zone

linkages.

Human Capital
The software sector’s human capital encompasses the collective characteristics
and abilities of its software professionals: quantity, composition, language skills,
and managerial skills. Each of these is discussed here in turn.

Quantity
The strength of a nation’s human capital stems from a multi-generational tradition
of science and engineering that has its roots in strong universities, polytechnics,
and vocational colleges. Thus, the recent success cases in this area benefited
from a strong national emphasis on advanced technical education that dates back
to at least one or two generations. Strong human capital in software cannot
emerge within a few years. Competitive human capital, perhaps more than other
factors in the model, emerges only after many years of national investment in
education. The quantity of specific human capital is important as well. A critical
mass of educated and skilled human capital is vital to the success of the software
industry.

India has one of the largest pools of technically qualified people in software,
IT and ITES. India’s key strength is the availability of a large pool of English-
speaking and technically qualified professionals at low costs. A large proportion
of Indian graduates are proficient in English, ideally suited to the growth of the
ITES industry. India houses world-class technical institutes such as the IIsc’s
(Indian Institute of Science), IITs (Indian Institute of Technology) and NITs
(National Institute of Technology), and a vast pool of state and private
universities, affiliated graduate and postgraduate colleges, which produce skilled
talent required by the industry. There are 350 universities and over 17,500 higher
educational institutions producing 3 million graduates, including 400,000
engineers (second only to China) and 225,000 IT professionals, every year in
India. As a result, companies have sufficient options to choose from, while
recruiting employees for their offshore captive centres. Further, it is expected that
the number of people in the working age group in India will increase by 250 million
during the period 2003-2020, at an average rate of about 15 million per year.
This will ensure labor for companies in the US and Europe, where the demand
for labor is increasing.

68 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

Composition
A nation’s software human capital is not uniform across the spectrum, as at the
higher end, we have highly talented and capable workforce, while at the lower
end, we have trained and skilled workforce. Still there is better synchronization
between both ends. India has a good composition of younger population.
Over 50 percent of India’s population is below 25 years of age.

Language Skills
English language ability has been very critical in national software success.
English skills appear on outsourcers’ checklists as a key criterion to decide on
the capabilities of software firms and software nations. English language skills
stem either from some historical connection with England or from national
investments in language education, beginning in early school years. India enjoys
advantages from both of these factors.

Management and Technical Skills

Technical and management skills are needed in order to manage successful firms.
For IT firms, resources can take the form of technical skills such as expertise in
specification, requirement analysis, design, coding or programming, and testing.
It also reflects the ability to integrate emerging technologies with a firm’s strategic
objectives. They can also take the form of management skills, such as the ability
to establish close links with the user community, the ability to effectively develop
appropriate cost-effective IT applications, and the ability to anticipate future IT
needs. The strategic value of resources can be viewed as the extent to which
these resources have an impact on the growth, prosperity and competitiveness
of the firm. Such skills tend to be taught in business and engineering schools.
So, it is the professionalization of technical and management education that is
necessary in order to build national software exporting industries. India is
experienced in software development and has been in the industry since the late
1980s. India possesses good management and process skills, and has a strong
business school network. There are 1,100 business schools in India producing
over 70,000 MBA graduates a year. Indian software professionals easily adapt
themselves to new technologies. In the software industry, where technological
obsolescence is the order of the day, flexibility to adapt to new technologies is
a major strength. Low training costs in India allow these professionals to be
continually updated on emerging technologies—a critical success factor in an era
of shortened technology life cycles.
Wages/Cost Advantages
Managers buying the so-called offshore outsourcing services tend to shop for the
lowest-cost supplier. These software development costs are mainly driven by the
wages of junior programmers to the experienced project managers. As is evident
from the wage pyramid given in Figure 3, the differences in wage rates are striking
and very tempting for managers who are under cost pressures. Over the recent

Indian Software Success Story: 69

A Resource-Based View of Competitive Advantages
 Figure 3: Wage Pyramid: Wages for Software

$63,000

USA

$44,000
Japan

$75,000
Russia

$5,000-$10,000

India China Indonesia Ukraine

$5,000- $5,000- $5,000 $5,000

$8,000 $9,000

years, wages in India have gone up, and India is no longer the lowest-cost
software nation. Instead, firms are turning to China, Vietnam and others, where
wages may be lower. This is the race to the bottom of the pyramid of software
outsourcing. There is relatively little that nations can do to compete in this cycle,
in which interest of the outsourcer quickly shifts to lower wage nations.
It is important to mention here that this dynamism is not unique to software.
In the post-war period, industrial manufacturing first shifted to Japan, which then
became too expensive. Then it shifted to Korea and Taiwan, which also became
too expensive, before it shifted to China, Thailand and elsewhere.
This phenomenon can be defined in purely financial terms. By placing offshore
software outsourcing in the context of global technology arbitrage, this
phenomenon can be defined as, “sourcing labor and capital where it is cheapest,
and selling it where it is most profitable. National borders do not matter”.

One of the biggest advantages of offshoring to India is significant cost savings.

Companies have been able to save about 40 to 60 percent of the costs compared
to what it would be in the western countries, for most services, by outsourcing
processes to India, thus allowing organizations a great competitive edge.
Cost savings in India can be accounted for by savings under the following two heads:

1. There is a vast difference in the labor costs in the US/Europe and India.
Indian professionals work for wages much lower than that in the US and
Europe. An IT professional with 1-2 years of experience in the US and
Europe charges $50,000 to 70,000 per year. On the other hand,

70 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

 a professional with the same experience level costs about $8,000 per
year in India, about 11 to 16 percent of that in the US and Europe.

2. Infrastructure costs in India are lower compared to the western

countries, thus saving significantly on investment capital requirement for
a project infrastructure.

Government Policy, Support and Vision

Many of the new software exporting nations succeeded because their government
took active steps to encourage the high-tech sector in general, and the software
industry in particular. Such policies have been given many labels—industrial policy,
science and technology policy, and innovation policy (Salmenkaita and Salo, 2002).
Basically, these policies channel national resources into sectors that the
government views as important to future economic growth. Heeks and Nicholson
(2002) point to the difference in national policy between the initial strategy and
the succeeding strategy/sustaining strategy. The sustaining strategy for India has
been climbing the value chain, which develops the strategy for diversification,
innovation and differentiation, and a shift from economy of scale to economy of
scope. In a minority of cases, the government had little to do with setting a vision
for the software export industry, but the industry succeeded anyway because
of favorable domestic and global factors. Emergence of Y2K and an increased
thrust on cost competitiveness because of globalization, has also contributed to
the success of the Indian software sector. The case of India may be one such,
though there are conflicting opinions about the deliberateness of the government
policies. Clearly, India’s economic liberalization in 1991 was a turning point.

Government can play a proactive or facilitating role. The government can

influence/facilitate the development of telecommunications infrastructure, the
availability of capital, including risk capital, the vibrancy of the industry, human
capital (through investment in education), quality of life, and wage levels. In 1991,
the government’s Ministry of Information Technology created the STPI (Software
Technology Parks of India) to encourage exports. At 41 locations across the
country, the STPI provides IT firms with services covering network design, system
integration, installation, operations and maintenance of application networks.
The Government of India has also set up innovative schemes like the SEZs (Special
Economy Zones) for promoting software exports. Of the 366 SEZs formally
approved by the government so far, as on October 15, 2007, 257 are for IT and
ITES accounting for 70 percent. Under the SEZ scheme, several tax incentives
are extended for 15 years. The Indian government also offers tax holidays under
Section 10A and 10B of the Income-Tax Act on various IT-enabled products and
services. India’s record on information security ranks better than most locations
in the world. The Indian government is maintaining a keen emphasis on further
strengthening the information security environment in the country. Specific
initiatives already underway include enhancing the legal framework through

Indian Software Success Story: 71

A Resource-Based View of Competitive Advantages
proposed amendments to the IT Act 2000, increasing interaction between
industry players and enforcement agencies to help create greater awareness
about information security issues, and facilitating mutual support.

Strong Quality Focus

Quality is the hallmark of Indian IT software and services. ISO 9000 certification
and SEI Level 5 are the order of the day. A majority of companies in India have
already aligned their internal processes and practices to international standards
such as the ISO 9000, Six Sigma, SEI-CMM (Capability Maturity Model) Level 5,
etc., which have helped to establish India as a credible sourcing destination, as
organizations are able to take advantage of their availability of robust processes,
documentation, etc., and focus on areas such as continuous process
improvement. As of December 2005, over 400 Indian companies had acquired
quality certifications with 87 companies certified as SEI-CMM Level 5—higher than
any other country in the field. High quality knowledge workers and attractive price
performance have been key components of India’s value proposition.

The Industry
Clusters
Cluster effects are essential characteristics of the industry itself
(Tessler et al., 2003). The best known high-tech cluster is Silicon Valley in the US.
In developing nations, the software industries are clustered around the large
metropolitan business areas, or in technology parks, because of the availability
of infrastructure. A cluster represents a critical mass of firms in geographic
proximity. Technology clusters are often deliberate government policy initiatives,
such as the Science Park in western Singapore near the major universities. Cluster
effects confer a positive benefit on an individual firm in the cluster, independent
of other firm characteristics. Cluster effects give rise to an environment of both
competition and cooperation among the firms. Competition spurs innovation,
cooperation spurs growth. Cluster effects also give rise to professional networks.
Indian STPs and SEZs are well-known examples of cluster effects.

Association/Body
Success is also aided by the software firms’ ability to pool some resources into
a national association or consortia that serve to promote the nation’s industry
locally and globally and provide services back to its member firms. Such a case
is the prominent Indian association NASSCOM (National Association of Software
and Services Companies), which helped the branding (in the marketing sense)
of the Indian software industry. NASSCOM is India’s premier trade body of the
IT software and services industry with 1200 members. NASSCOM is also a lobbying
body for representing issues of the software industry to the government.

Vision
Heeks and Nicholson (2002) conceive that the success of the national industry
is driven by the coherence of the industry’s (and to some extent the

72 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

government’s) vision and strategy in defining the industry’s focus. Malaysia set
its vision early on multimedia and built the ‘multimedia corridor’ between Kuala
Lampur and the airport.

Standards
Finally, the success of the Indian software industry has demonstrated that
attaining internationally-recognized standards of quality is an important
component of the industry focus. These standards address the following
problem—outsourcing software and services requirement to a distant, exotic
foreign firm is a risky proposition. The Indian industry understood this predicament
early by embracing the CMM. CMM is a structured process for software
development, associated with the Software Engineering Institute at Carnegie
Mellon University. It consists of five maturity levels. An SEI-CMM rating brings
credibility to the process of software development being used by the firm. It plays
a specific role in getting work for the company. Now that Indian firms have
acquired the highest international quality standards, and practise these
standards with greater success than do most of the US organizations, India is
seen as a safe (or even the most preferred) destination in this regard.

Capital
A software industry must acquire enough capital to grow. The Indian software
industry has been able to grow predominantly from the working capital
(internally funded), which is unlikely to be enough, now that the global software
industry has become more competitive. Capital sources for software firms can be
a combination of domestic and foreign. Domestic sources include government
funds, venture capital, investment capital and equity offerings. Foreign sources
include foreign loans, venture capital, investment capital (Foreign Direct
Investment/FDI), foreign equity offerings and foreign aid.

Project/Technological Infrastructure
Technological infrastructure refers to the sophistication and reliability of
communication technology. Software firms require abundant, reliable, and cheap
telephone and broadband data communication connections. The case of India is
instructive. Beginning in the 1980s, the Indian software firms have bypassed the
unreliable terrestrial infrastructure by using satellite technology to communicate
between top Indian software enterprises and clients abroad. In cases where this
infrastructure is absent on a national basis, ‘cluster-centered infrastructure’
(technology parks or high-tech office centers) is the preferred alternative for
software firms. For example, the Philippines is sprinkled with such parks that
advertise high connectivity. Clustering also addresses other infrastructural
needs—Indian firms usually operate in buildings and technology parks with
alternative power generation to compensate for unreliable public sources. India
administers one of the largest telecom networks in Asia, and is the fifth largest
in the world with 50 million telephone lines and 700,000 kms route of fibre optic
cable network. Over 33,000 VSATs (Very Small Aperture Terminal) are installed all

Indian Software Success Story: 73

A Resource-Based View of Competitive Advantages
over the country by various service providers, private users and government
agencies.

Linkages
Linkages are essential to business. Managers choose business links that they
view as minimizing their perceived costs of doing business (Kogut and
Singh, 1988).

Linguistic Linkages
Linguistic linkages are very powerful linkages. Since English has always been the
dominant language of computing and business, English skills tend to be a critical
linkage. The success of India (a former British colony) is, in part, attributed to
this English fluency. The importance of English is somewhat diminishing.
New regional linkages have begun emerging in recent years that weaken the
traditional dominance of English. The Chinese have capitalized on their closer
linguistic and cultural ties with the Japanese to become a destination for offshore
work.

Diaspora Linkages
Diaspora linkage also has been a critical success factor. To illustrate, the success
of the Indian software industry is due in part to the successful and well-placed
diaspora of Indians in the US high-tech firms. This generation of Indians who came
to the US for education, stayed on and rose to influential positions in these firms.
The ‘brain drain’ has become a ‘brain gain’ or a ‘reverse brain drain’, in the ties
and know-how that have been forged between firms in the home country and
the diasporic country. These scientists and engineers left their home countries
and sometimes many years later, returned, or invested in, or encouraged
acquisition in their home countries. These diaspora linkages are also evident in
other countries, such as Israel, Taiwan, Korea, China and Ireland, that have
succeeded in high technology. India has a supportive diaspora with proven
entrepreneurial skills, as 40 percent of the US start-ups have Indians among the
top five executives.

Time-Zone Linkage
It facilitates communication with customers in the US and capitalizing on same
time zone advantages with the US. While the US sleeps, India works. India’s
unique geographic positioning makes this possible. India and the US have a zonal
time difference of about 12 hours, thus effectively giving firms a 24-hour work
environment. Most of the processing functions are performed during the daytime
in India, when it is nighttime in the developed countries. As a result of this zonal
time difference, there is no or little backlog in the front end and processing tasks.
The advantage of this zonal time difference is more prominent in IT outsourcing.
Many IT projects have onsite and offsite teams. The onsite team works during
the day at the client site and hands over the work to the Indian team before
retiring to bed. The offsite team then works on the same project as it is daytime

74 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

in India. When the Indian team retires to bed, the onsite team takes over the
work, thus, significantly reducing the project turnaround time. Nortel Networks,
an IT firm headquartered in Canada, started its operations in India to harness
the benefits of the time difference between India and Canada, along with cost
savings.

Emerging Strategies for the Indian Software Industry:

A Resource-Based Analysis
Situation of ample low-cost resources provides
Table 1: Barbie in Search of
cost advantages in delivery of final products
New Home
and services. For the Indian software industry,
Time Home of Barbie
there were many low-cost resource advantages
Period (Made in)
since the very beginning, viz., low wages,
1960s Japan
large pool of English speakers, highly educated
1970s Hong Kong
and skilled workforce, low infrastructural cost,
etc. When these resources gradually diminish 1980s Philippines
and become scare, the cost competitiveness 1990s Indonesia
would get reduced. Countries or firms can sell 2000s China
anything if it is quality product, yet cheap
enough. But as a country continues to sell cheap products to the world market,
its economy improves and wages go up along with its input costs. Subsequently,
those cheap products get more expensive. Business is again relocated to another
low-cost country and ultimately the country’s global business goes down. Take the
example of the ‘Barbie doll’. Barbie is a global brand that did $3 bn business (sales)
in year 2007. In each decade, Barbie shifted her home, as shown in Table 1.

It can be concluded that when the Chinese economy improves substantially,

its wages will go up, the production costs will also go up, and Barbie will again
be looking for a new home. No country has ever achieved sustainable competitive
advantages by building cheap commodity products to sell to the world market.
In the long run, the only way a country ever achieved competitive advantages
was by building great brands to sell to the world market. Low-cost resource
advantages coupled with economy of scale provides cost competitiveness, but
it is not sustainable in the long run.

Indian IT firms are at the lower end of the global software market, focusing
mainly on low-cost outsourcing job. For example, both Infosys and Capgemini had
an employee force of around 70,000 employees. However, while Capgemini
managed a revenue of $13 bn, with the same work force, Infosys could only
manage $3 bn. Indian firms should brand themselves on the global stage as a
supplier of value skills. Indian software firms have to change their role from being
providers of commoditized contract labor services, to becoming product/branded
solutions consultants. Many Indian firms are not going beyond ‘contract rate’
based competition. This has resulted in giving more weightage on contract billing
rates rather than on the unique quality of the product.

Indian Software Success Story: 75

A Resource-Based View of Competitive Advantages
 Ultimately, in order to succeed as the dominant knowledge industry, Indian
software firms need to specialize in some domain/niche areas, either in specific
services or products. For example, Israeli firms specialize in enterprise software,
and storage and data solutions, which enhance corporate efficiency as well as
security-related IT systems, including Internet security, e-mail surveillance, data
mining, data fusion, situational awareness, and pattern and image recognition.
Those national industries that sell only commodity products and have not
specialized are less likely to succeed in the long run, and would quickly lose
competitive advantages.

Dynamic Resource-Based Model for the Software Industry

Based on cost and differentiation advantages, products can be divided into two
types—commodities and brands. The only way to sell a commodity is by selling
it cheaper than market competitors. A brand, on the other hand, is a product that
is distinct and different with unique value proposition. In the long run, a country
needs to build brands to sell to the world market, not commodities. Sooner or
later, a commodity-driven country will reach a trip point where its products are
not competitive anymore, and further, growth would become difficult. Countries
or firms do not build long-term competitive advantages with commodities. They
need to build strong brands by allocating big budgets for branding and
advertising, to reap long-term benefits.

Figure 4 represents the dynamic resource-based model. This model has 4

quadrants. Quadrant 1 represents ‘Low-Cost Resources – Low-Cost Resource
Advantages’ (High-High), Quadrant 2 represents ‘Low-Cost Resources –

Figure 4: The Dynamic Resource-Based Model

L Differentiated Resources H

To be avoided Premiumization

Quadrant 4 Quadrant 3

Low-Cost Differentiation
Advantages Advantages

Commoditization To be avoided

Quadrant 1 Quadrant 2

H Low-Cost Resources L

76 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

Differentiated Resource Advantages’ (Low-Low), Quadrant 3 represents
‘Differentiated Resources – Differentiated Resource Advantages’ (High-High), and
Quadrant 4 represents ‘Low-Cost Resource Advantages – Differentiated Resources’
(Low-Low). To maintain a dominant position in the software market, India should
move up from Low-Cost Resource Advantages (Quadrant 1) to Differentiated
Resource Advantages (Quadrant 3). In that situation, differentiation strategy
creates domain specialization for long-term competitive advantages. Similarly, with
the lack of cost advantages or differentiation advantages, it is difficult to maintain
competitive advantages. These prospective effects are represented by the 4
quadrants of the dynamic resource-based model, as is given in Figure 4. The salient
features of Quadrants 1 and 3 are given below:

Quadrant 1 (Low-Cost Resource Advantages):

In the scenario when the ‘Low-Cost Resource Advantage’ is high, it gives big
cost advantages as shown in Quadrant 1. It is characterized by low price action.
Initially, India was having many low-cost resources for software outsourcing.
Hence, it ultimately benefited from big cost saving. This is because of the
commoditization of software coding jobs. Till now, India was enjoying this benefit
of cost competency.

Quadrant 3 (Differentiated Resource Advantages):

In the scenario when ‘Differentiated Resource Advantage’ is high, as shown

in Quadrant 3, it provides benefits of specialization and premiumization. It is
characterized by high price action. For maintaining long-term growth and
sustainability of the Indian software industry, much emphasis is being laid on

Figure 5: Dynamic Resource-Based Cube Model

Differentiation
9-9-9
Advantages
9 1-9-9
Differentiated
Premiumization
Resources
4

1
9-1-9
9 1-1-9
9 4 1
Low-Cost To be
Low-Cost Advantages Avoided
Resources 1-9-1
9-9-1
4

Commoditization
1
9-1-1 1-1-1

Indian Software Success Story: 77

A Resource-Based View of Competitive Advantages
moving up the software value chain. The upper segment of the value chain, i.e.,
the products, require strong R&D base, alliance with academic and research
institutes, high amount of technical, marketing and selling skills, and is a
high-risk and high-return segment. Innovation through R&D involves large
financial resources, long time span, and technical competence. Microsoft, Oracle,
SAS, etc., spend heavily on R&D; for example, SAS spends 40 percent of income
on research. Many Indian IT firms are still operating at the lower end of the value
chain, while the higher end of value chain is dominated by consulting firms such
as PriceWaterhouseCoopers, McKinsey, Capgemini and product-oriented software
firms such as Oracle, etc. A three-dimensional dynamic resource-based cube
model is shown in Figure 5.

Table 2 explains the values of the edges of the cube shown in Figure 5, with
interpretations in terms of resources.
Table 2: Values of the Edges of the Cube and Their Interpretation
Value Interpretation

1-1-1 Lack of competitive advantages

1-9-1 Unproductive differentiated resources

1-1-9 Unproductive low-cost resources

1-9-9 Unproductive overall resources

9-1-1 Unsustainable low-cost advantages
9-9-1 Differentiated resource advantages
9-1-9 Low-cost resource advantages
9-9-9 Overall competitive advantages

Dynamic Resource-Based Model: Implication for the Indian

Software Industry
High wages, rising rupee, high attrition rate, high infrastructural cost, expiry of
government incentive scheme (IT exemption), etc., put tremendous pressure on
the performance of the Indian software industry. Wages of Indian IT professionals
are growing rapidly. According to Hewitt Associates, India had the highest
average salary increase in Asia in 2007. Across a range of industrial sectors,
software accounted for the highest wage bills at a time when competitive
pressure was pushing billing rates downwards. In the last few years, there was
an average wage hike of 14-15 percent for the offshore employees and 3-5
percent for the onsite staff. In the process, they have been closing the gap
between India and other emerging IT destinations. The Indian Rupee has
appreciated by 12 percent against the US $ in the last 12 months.

To cope with these pressures, the Indian software firms need to climb the value
chain and expand their product and service ranges, focused towards higher value
processes and product development services, rather than being confined to
providing ‘low-cost’ labor based on hourly rates. Indian firms should move to niche

78 The Icfaian Journal of Management Research, Vol. VII, No. 8, 2008

product of specialization with high price, that is, differentiated product. The Indian
IT firms must strive to move up the value chain—from being once considered as
mere providers of low-cost back-end commodity services—to offering high value
consulting, solutions and software product offerings.

For the Indian software industry, it is necessary to continuously build up

resources and capabilities, and move from ‘low-cost’ commodity business model
of coding and programming to the ‘differentiated’ premium product model. Here,
‘premium product’ signifies the association of high level of skill sets and resources
for commanding premium and demand for the product in the marketplace.
High profit margins, brand building and long-term competitive advantages are the
main benefits of such differentiation strategy. To move from low skills-based
programming and maintenance jobs to high knowledge-based product
development, it is essential to club domain expertise with leading edge
technologies through major R&D investments. This would help in meeting the
challenges in developing new products, thereby offering long-term earning
potential and sustainable competitive advantages.

Future Outlook
The Indian software industry faces a difficult challenge. Can it move its position
beyond selling commodity skills in programming (e.g., experience with platform
A or programming language B), with little specialization and differentiation?
Meanwhile, global software competition continues to broaden and become even
more competitive. The resource-based theory of the firm (Wernerfelt, 1984)
argues that in order to gain a sustained competitive advantage, firms must
develop firm-specific resources or capabilities that are valuable, rare, or costly
to copy. It is quite unlikely that being a low-cost software producer, by competing
simply on low wages for commodity-type skills, is the path to a sustainable
position. If Indian software industries do not add value beyond simply being the
low-cost producer, they will soon see their work shift to lower-cost destinations.
This is the ‘race to the bottom’ (of the wage scale) that typifies such commodity
work. Software work moved first to India because of low wages. But recently,
many outsourcing firms are looking to nations where wages are even lower.

Conclusion
India is almost a synonym for IT and ITES outsourcing and is the most preferred
outsourcing destination. With increasing competition from emerging IT-savvy
countries, increasing raw wages, along with appreciating rupee, margins are
reducing for the Indian IT firms. India needs to parallely develop a
product-oriented industry along with the service-oriented industry, and climb the
value chain. Instead of defending low-wage jobs, Indian IT firms should move
to becoming providers of high-value, high-margin services. Only nations which can
predict the future and initiate changes to prepare themselves for the challenges
ahead can survive in an era of intense competition and globalization.

Indian Software Success Story: 79

A Resource-Based View of Competitive Advantages
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