This report will focus on Sri Lankan Advanced Technology Center (ATC) of Virtusa Corporation. Being a firm, operating in a rapidly changing, increasingly competitive market, it is a great challenge to gain competitive advantage when competitors are offering similar products and services. Thus Virtusa need to be cautious about the changes affecting the business environment and should come up with new strategies to overcome these challenges.
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Macro environment factors were analyzed through the PESTEL framework and key driving forces were identified. These key drivers are government Support on the IT Sector, rapid technological change, growth in the IT industry and high demand for high quality products. Changes in these factors would directly affect the firms operating in IT industry in Sri Lanka. Micro environment factors were analyzed through the Porter’s five forces model and the attractiveness of the IT market is discussed and the relationships has been identified. Hence the strategic groups will be categorized to identify the current competition in the IT industry.
Finally Core competencies of Virtusa are discussed through Value chain and using VRIO framework and this report will further comments on the strategic direction of the Virtusa Corp. Sri Lankan ATC.
IT industry in Sri Lanka
IT industry in Sri Lanka had a rapid growth over the last decades, with highly literate, easily trainable and intelligent workforce. With the latest technology available; the industry offers a wide range of services such as consultancy, system integration, software systems design, support services and so on.
The major markets serviced by Sri Lankan IT companies are USA, UK, Singapore, the Netherlands, and the Philippines. For this report’s purpose only Sri Lankan Software market and their local competitors will be considered.
The Company and SBU
Virtusa is a publicly-traded, rapidly-growing global IT services company with over 3,700 consultants and 14-year history of providing full lifecycle of software development. Kris Canekeratne together with a small team of co-founders established Virtusa in 1996. Today, Virtusa is recognized as a technology thought leader, having amassed a wealth of emerging technology expertise that spans Retail, Telecom, Storage and Financial Services. The company has the ability to take advantage of its industry knowledge-base and best practices to deliver an unparalleled ROI to its customers having deployed 400+ product releases for over 100 product developers, Virtusa has highly reputable client base and also has partnerships with leading software companies to develop and test over one thousand software product releases.
While it is headquartered in Westborough, MA, its offshore development centers, known as Advanced Technology Centers (ATCs), are in 3 locations in Asia: Hyderabad & Chennai, India, and Colombo, Sri Lanka. As for the current competition in IT industry, Virtusa has decided to expand their wings to other emerging markets. With this intension Sri Lankan IT projects being undertaken, this report will only focus on the Advanced Technology Center in Sri Lanka as a SBU.
Macro Environmental / PESTLE Analysis
There are many factors in the macro environment that will affect the business of any organization. Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of macro change.
Current Sri Lankan political environment known stable compared to other Asian neighbor countries. The end of the 30 plus year civil war has been favorable for growing industries, with new industries like IT making significant economic contributions.
Recent trends show Asian regions attracting multinationals shifting their IT bases (outsourcing) into countries in the Asia, with the intention of exploiting the widely available cheap and highly skilled labor. Sri Lanka has also been able to attract considerable projects from FDIs such as Virtusa itself outsourcing their projects to Sri Lankan and Indian ATCs.
These global trends in IT industry has in turn increased the political attention on the industry, with government focusing on IT education to ensure highly skilled labor force, for example the introduction of IT to school curriculum and the establishment of an ICT agency to train youth to ensure future growth of the industry.
The government’s role on the ICT sector
The government introduced the e-Sri Lanka framework in 2002 for the development of the ICT industry with the help of the Information Communication Technology Agency (ICTA). Under this framework the government introduced e-government policy which is useful for new organizations to improve the ICT literacy rate and cost effective connectivity throughout the country.
Figure 1: Elements of e-Sri Lanka Vision (Hanna, 2003)
Government vision is to interconnect all the government offices in the country through a single web portal. The concept of e-government is to allow citizen to enjoy services anytime, anywhere such as (Hanna, 2003): E-Parliament, E-Cabinet, Financial management, taxes, customs, payment and so on. Effective implementation of this platform will help to improve the computer literacy rate throughout the country.
The Sri Lanka Telecom Regulatory Commission (TLC) is responsible for regulation of the tariffs of services provided by dominant players in the ICT industry. The TLC with government and ICTA also engage in developing IT facilities, IT infrastructure through implementation of new government policies such National Telecommunication policy to maintain stability in the industry and remain competitive, while protecting the consumer from monopolists.
With these factors it is apparent that the ICT industry in Sri Lanka is protected by government regulations and policies. Most of the private firms are encouraged to undertake government projects so they can earn profits and grow their businesses. For examples Virtusa is working collaboratively with ICTA in order to build this e-government framework, helping to create web portal for the vehicle license renewal process which is called e-revenue license. Post war condition of the country has shifted attention to reconstruction efforts in country, providing further growth in all industries. The increased government expenditure on infrastructure would attract FDIs leading to knowledge and technological transfer leading to further high growth rates in the IT industry.
Though a small open economy, the Sri Lankan economy has undergone major transformations during the past few decades, most recently having suffered through the global financial crisis. Consequently, the IT industry of Sri Lanka has been instrumental in the contributing to a sustainable economic growth.
The reform process since 1977 acts as the key driving factor for the Sri Lankan economy to integrate into the world economy. This enabled the economy to enjoy the benefits of globalization, as a figure below shows the increased openness of the Sri Lankan economy since then. (Islam & Hossain, 2006)
Figure 2: Openness of Sri Lankan Economy (Islam & Hossain, 2006, p. 176)
Being an open economy and fueled with the benefits of globalization, the Sri Lankan IT industry enjoyed further growth potentials. Sri Lanka deals with the leading IT brands and IT educational institutes from around the world and also is one of the key players in the IT education sector in the South-Asian region. The IT industry acts as a service exporter contributing immensely to the growth of the economy.
According to the World Bank economic update on Sri Lanka (2009), economic activity decelerated sharply at the onset of the global financial crisis. Currently with the gradual recovery of global economic crisis, Sri Lankan economy is likely to experience a growth through exports, increase in tourism and possible greater FDI inflows. These economic growth factors will effect on industry sectors including IT by facilitating their growth prospective simultaneously.
Most importantly exchange rate influences the IT industry in general. When dealing with foreign suppliers in acquiring licenses and hardware components, exchange rate fluctuations affect firms business in numerous ways, with licenses costing large sums of money due to high risk exchange fluctuations. For an example settlements in US dollars, would result in losses for the company if there’s a high volatility of the exchange rate of US dollars against Sri Lankan rupees.
The increase of interest rate on borrowing can be considered as unfavorable trend for the IT industry in general. When analyzing the interest rate on borrowings for the financial year of 2010, there has been a declining trend in the interest rate generally. So it’s a positive sign for any industry which need heavy investments, providing growth potentials on the IT industry sector allowing the firms to expand their business operations.
Socio cultural factors
As a multicultural community, the urban areas of the country sharply contrast with the rural area with its highly-skilled, educated and competitive English speaking workforce, and developing IT knowledge in the rural areas has remained a barrier for expanding businesses and other investments in IT development for the companies
Below are some of the cultural barriers adopted from “The Impact on National Culture on E-Government Implementation” (Ali, Vishanth, & El-Haddadeh, 2009)
Language & ICT literacy rate English is used only as a second language; many rural citizens have no knowledge of English
Lack of Awareness: citizens’ lack of awareness of e-services; citizens uninterested in e-government
Religion and beliefs: Negative impact on the society and particularly the youth used by leaders and the older generation becomes a barrier to developing IT
Table 1: Computer awareness and Computer literacy of household
population (aged 5 – 69) by sector and province (DCS, 2009)
Though the country’s literacy rate has increased to 31.1% in the urban areas the rural results only 19.3% which is a slight increase compared to 2006/2007. The government is taking measures to educate citizens about the IT industry and increase literacy rate and language skills.
Despite such cultural barriers the government hopes to build an e-society and create awareness about the IT industry. Increased awareness on IT within the society can be considered as a favorable trend that would directly influence the industry growth in general. Increased Internet accessibility has facilitated the IT learning to a great extend, thus providing many opportunities for growth in areas of E-business and E-commerce, as shown by the increased popularity of e-banking and e-shopping.
Since the late 90s, Sri Lanka has observed a major boost in IT industry. Especially in the area of software-engineering, the skill-base is at a commendable level compared to some other Asian countries. The technological advancements have positively contributed to the growth in the IT sector creating many opportunities for the industry. Technology is rapidly changing over time and firms need to adopt latest technologies in order to stay in the business. The early adaptation of latest technologies is a key factor which would enable the firms to achieve a relative advantage over their competitors. These technological advancements will fuel IT workforce through training and development as a means of equipping them with all the latest technologies that would in turn help the firms to provide more latest technological solutions for their customers. The number of users of services like Internet Banking and Mobile Transactions are on the rise implying that people are confident with these services.
The natural environmental factors are contemporarily one of the key trends for any business to consider in making strategic business decisions. Relative to the IT industry, the most relatable issue will be cost of energy in addition to other environment degradation factors which need to be considered maybe in a “social-responsibility” perspective. Most of the firms have adapted “Go Green” concept which will aims at minimizing amount of power usage.
Sri Lanka already concentrates on number of projects on sustaining environment management such as those ongoing and planned projects conducted through the assistance of ADB especially in transport, water supply energy, and rural development (ADB, 2008). Such projects provide various opportunities for the IT industry, such as stand-alone or web-based project management/monitoring applications.
Given the infancy of the Sri Lankan IT industry, and the initiation of the e-government projects, Sri Lankan legislative infrastructure requires more legal frameworks to govern and monitor the technological challenges and pertaining issues.
The Customs Act states that all imported media such as software CDs and hardware have to be declared at the Customs. Also there is Intellectual Property Rights Act which will limit using other brand names and logos without having proper agreements with these parties.
The Sri Lankan Information Communications Technology Agency (ICTA) has strengthened its efforts in broadening a generic global standard like United Nations Commission on International Trade Law (UNCITRAL) and was able to ratify some of the required contemporary ICT laws such as e-Transactions Act and Computer Crime Act (UNPAN, 2009). This is an indication that the legislative structure is in the process of aligning itself to compliment the requirements of the rapid evolving IT industry.
Key driving forces
Through the PESTEL analysis, several key drivers of change that influence the IT industry in Sri Lanka can be derived.
Government Support on the IT Sector
Government has clearly identified the importance of the IT sector and supports the growth of this sector by giving focus to IT education and improving the IT infrastructure in the country. This would provide further opportunities for the IT firms to expand their business activities into many specialized areas of the industry in future.
Rapid Technological Change
Rapid growth and change in technology will affect the IT industry by facilitating high levels of competitiveness and differentiation among competitors for the ability to adopt new technologies.
Growth in the IT Industry
With the reconstruction efforts, Government has increased expenditure on infrastructure that would attract FDIs leading to high economic growth, fueling growth rate of the IT industry, by attracting new entrants to the market. .
High Demand for Quality Products
As malfunctioning of software is unacceptable, customers place importance on the quality of the product rather than the price of software; hence low cost does not differentiate competition in this industry. Hence, even the most cost-sensitive customers will consider quality over price, and it remains a key area when determining an appropriate strategy for IT firm in Sri Lanka.
Changes in these key driving forces would directly affect the firms operating in IT industry in Sri Lanka.
Micro Environmental Analysis
Five Forces Analysis
Michael Porter developed the five-forces model in the 1970s to examine the five main structural elements in any industry; Figure 3 provides a summary of these forces (Bamford & West, 2010, p. 103).
Figure 3: Five Forces of Industry Structure (Bamford & West, 2010, p. 104)
Based on five forces, the attractiveness of IT industry in Sri Lanka is evaluated as follows:
Threat of New Entrants
The competition in an industry will be higher if it is easier for other firms to enter this industry. The threat of new entrants will depend to the extent to which there are barriers to entry. When analyzing the IT industry, there are several factors that impose certain barriers for entry. The most common barriers are economies of scale, high initial and investment costs, brand loyalty of customers, protected intellectual property rights like patents, high switching costs for customers and legislation policies and government actions.
Since the IT industry in Sri Lanka is in growth stage the impact of economies of scale on this industry is minimal. Government continuous support on IT industry will favor the new entrance to the market. Government regulations and policies are aligned to support the emerging firms entering the industry. Even though, entry to the IT industry is not easy as it involves partnership fee and latest infrastructure, making entry costs high. As the initial capital requirement is higher it’s harder for new enters. Also provided that the IT solutions require the acquisition and maintenance of partnerships with different players such as Sun, Oracle and Microsoft, difficulty in obtaining such partnerships acts as a barrier.
Customer loyalty is another element that threatens the new entry. Most of the key players currently in the market have differentiated their products and services. And their brands are well known and the customer loyalty is high in this industry since the switching cost is high. The need of a technical support teams to integrate and maintain IT systems is also in turn create a barrier for most of the new entrants. Managing highly technical workforce is costly and hence, most organizations to develop a competent workforce are competitive advantage over their competitors.
Most of the dominant firms in the market is already having highly skilled technical support teams and having a good customer perception and enhanced relationships, thus reducing the number of new entrants to the industry.
Rivalry among Groups
With the industry undergoing fast growth rate, and in an uphill development, the industry is still attracting competition, despite the dominant players in the market followed by the middle-sized firms. The competition between these players is high. The level of differentiation of product is another factor which will determine the position of the competition. Early adaptation to new technology allows the firms to differentiate their products and services from their competitors. This enables the reduction of competition to some extent since the switching cost is higher for customers. So most IT firms focus on specialization on certain areas rather than targeting the whole IT market.
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The quality of the software products and services is more significant than price, hence most firms work towards building customer confidence and relationships to ensure long lasting business relations, in addition to value added services such as solutions and support for their customer base. Exit barriers for the IT industry are very high since the initial investment is high and firms need to put lot of resources, and competition remains high, as some firms are stuck with the business despite wanting to exit.
Although a low pricing strategy helps competition in other industries, for IT it’s the quality of the product that is significant for the customers. Even though the IT industry in Sri Lanka is in growth stage as a whole, generally we can say that competition among rivalries is low due to above facts.
Threat of Substitutes
A threat from substitute exists when there are alternative products with lower prices and of better performance for the same purpose. The competition from substitutes can also be affected by the ease which customer can switch and if switching costs are low or insignificant. In this case, the switching cost in this industry is high we can see that the threat of substitute is bit low for IT industry than in other industries.
So many technologies and languages are being used in the process of a software development. Competing firms may use one of these technology or mix of technologies. So it’s important to have highly skilled engineers in these divergence technologies to have an edge over other firms. Also many of the customers prefer enhancing existing software rather than build it from the scratch for cost effectiveness. So the tendency to start a project from the beginning is low where the IT firms could have earned more profits. Moving one product from one vendor to another is costly. Hence the threat of substitute is low if the firms are working in continuous development projects.
Pirated software freely available on internet can be considered as another form of substitute. These illegal copies of original software produced by different vendors can be downloaded from internet for a minimal cost and configured accordingly to cater the customer’s need. However, substitutes may create impact on new smaller projects especially in terms of cost when such solutions are risk free and don’t affect the business continuity in greater scale. Yet due to the lack of references, technical support and confidence like performance, expandability of the product of those substitutes, the impact would be minimal.
Since the customers are quality conscious than the price the threat from substitute products is getting lower, and hence the impact from the substitutes for IT industry is insignificant.
Bargaining Power of Buyers
As every firm is engaging in a fierce competition by product differentiation and value added services the buyers has a high bargaining power in IT market. This is due to the fact that the customers are provided with the opportunity to choose between numbers of firms, such as demand for extended payment schemes on interest free basis.
Customers are willing to sacrifice cost for high quality implementations especially when the proposed solution is a revenue generator or a critical system. Customers hence generally do not have much bargaining power over purchasing of product and support services mainly due to the quality consideration and the fewer number of dominant providers.
Bargaining Power of suppliers
This analyzes how easy it for suppliers to drive up their prices and how it will affect the industry. Firms in IT industry involves in a number of categories of projects, and therefore, here we take a few categories and investigate further who the suppliers of those categories are and the power of the suppliers. Mainly we can consider vendors who allow IT firms to use their technologies and getting a loyalty fee from them as suppliers. These vendors charge a huge amount of money and it’s really hard to get a partnership with them. Also there are only few dominant vendors such as Microsoft, Sun and Oracle. Since the cost of switching between these suppliers is higher, the bargaining power of the suppliers increases to a great extent. Sometimes it may reduce due to the availability of large number of suppliers providing homogenous products and technologies.
Different technologies used by different firms in order to provide software solutions. To use some of these technologies firms need to pay loyalty fee for the patented company. For an instance JAVA technology is owned by Sun Microsystems. To use these technologies firms should have agreements or partnerships with these suppliers. Also the IT industry is the sole customer of these suppliers. Hence the bargaining power from suppliers is significantly high in IT industry.
Conclusion of the Industry Analysis
With the five forces analysis, it is certain that the IT industry in Sri Lanka is very attractive. This is due to the fact that the industry is currently experiencing positive government support. However, high entry barriers with regard to high capital investments in terms of training and development and buyer loyalty discourage new entrance. Also it’s hard for new entrants to earn the partnerships from the dominant technologies providers. Moreover, fewer vendors as suppliers will not provide a wide array of choices for the IT firms that would increase the bargaining power of suppliers to a great extent. The industry rivalry is low due to customer loyalty and quality concerns. Threat of substitutes is low due to the facts, that the switching cost is high and customers are more quality centric than the price. Bargaining power of buyers is less since there are only few major players in the market and the switching cost is also high.
Overall the IT market in Sri Lanka is very favorable for the dominant firms which has already settled down but not for the small firms which are entering the market now.
Inter Connectedness of Macro & Micro Analysis
With analysis we can identify relationships between some of the key driving forces and environmental forces. In the current context the government support for IT industry is high. Hence the government policies and regulations will be aligned to support the industry. This will favor the new entrance to the market and then market competition could be higher.
Micro forces are likely to change relative to activities in the macro environment. Low interest rates on borrowings would lower financial barriers result in attracting new entrants. Furthermore, the drive towards acquiring low cost solutions would further attract more SMEs intensifying competition within the industry and would further lead to price competition. Again if the exchange rate fluctuation is higher, the threat of new entrance will be lower due to the high risk and will reduce the market competition.
Enhancements in IT technologies and infrastructure will affect the current competition in the market. Since the technologies are changing quickly the customers will move to different firms who are capable of adapting to these changes. So the buyers bargaining power will increase and the substitutes in the market will also increase. Finally high demand for quality products will reduce the market competition. Low price competition will reduce the bargaining power of buyers. Increased customer loyalty for firms providing high quality products will act as a barrier for new entrants.
When analyzing the Srilankan IT industry in general, there are number of players with different capabilities competing on different bases.
Table 2: Competitors in the IT market and their core areas
When analyzing the competitors for Virtusa corp. in terms of the extent of product diversity and the size of the organization, we were able to find following strategic groups.
Large organizations with high product diversity : Virtusa, Millennium IT, JKCS
Small organizations with high product diversity: Creative Solutions, Aepona
Small organizations with considerable product diversity: Navantis, Zillion
Small organizations with low product diversity: Informatics
Figure 4: Analysis of Industry Competition 
IT industry in Sri Lanka is highly fragmented in terms of the area of competition. As we can see there is no large firm in size which has low product diversity. That means when firms are growing they tend to diverse their products in order to be competitive. It is clear that the competition among these companies is high provided that their area of competition is similar to others. Only small number of firms is providing a wide range of products and services that enable them to provide more integrated and comprehensive business solutions when compared with other firms in the market. The high investments on these solutions would encourage the customers to look into factors such as industry references and loyalty factors in determining the credibility of a firm, thus acting as a barrier for the mobility between groups. This provides them the opportunity to differentiate their products and services from the rest and thus, enable them to stand out from the competition.
Strategic capability analysis
Core competencies are groupings of individual competencies that establish uniqueness for an organization (Kaufman, Oakley-Browne, Watkins, & Leigh, 2003, p. 306).
Table 3: Strategic Capabilities and Competitive Advantage
(Johnson, Scholes, & Whittington, 2008, p. 118)
Table 4: Identification of Strategic Capabilities and Completive Advantage for Virtusa
Latest technologies and availability of advanced technology centres, IT equipments and latest systems, sufficient capital to meet requirements, skilled workforce, large base of loyal customers
Knowledge & experience in the ICT industry & long established client and supplier relationships
Maintenance of company resources such as latest IT systems
Management of skilled engineers and business processes
Maintaining good company relationship with satisfied confident customers
Maintaining high quality of services such as consulting, application development and quality engineering services
Educating and training the workforce on software development, technologies and equipment used and total quality management (TQM)
Capabilities for Competitive advantage
Unique technologies such as BPM, Cloud Computing, SAAS, and technological centres such as Virtusa Business Process Competency Centre, strong fiscal growth rate, strong leadership
Brand image and reputation
Strategic partnerships with IT giants all over the world
E.g.: SAP, ORACLE, FAT WIRE etc.
Business model that the Virtusa has gained through experience and continuous learning
E.g.: Unique Global delivery model
Unique expert skills with creativity and ability to innovate
E.g.: New innovative approaches to software development life cycle
Ability to retain and train highly skilled professionals
Focuses on business outcomes and improving IT efficiencies within enterprise business processes creates tremendous competitive advantage for the company clients
Ability to provide high quality end products through the unique quality assurance department.
People driven culture – Committed to best HR practices and aligning HR strategies with business strategies.
Virtusa should ensure in satisfying customer requirements through continuous improvement of strategic capabilities for sustainability and competitive advantage over its competitors. Strong leadership helps the process of creating competitive advantage to the company with unique services, infrastructure and skilled resources. Most companies lack strong leadership. Customers and skilled engineers are treated as assets for the company and long term relationship with customers build a positive image to the company and maintain its reputation in the minds of customers which creates success. Strong financial growth rate also supports company’s growth. Employees and Top management’s awareness of the external environment is required for the firms growth. Also with rapid change in the IT industry continuous training of employees with latest technology, equipment etc for adaptability are needed along with, maintenance of resourc
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