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Insoftware抯comingshakeout,bigcompanieswillgetbigger,whilesmalleroneswillneedtoplaysmartorcloseshop.KENBERRYMANANDJIMSEABERGTheMcKinseyQuarterly,2004Number1Fartoomanysmallandmidsizeenterprisesoftwarecompaniesspendtoomuchonsalesandonresearchanddevelopmenttosurvivethecomingshakeout.Manyrelyoncashreserves,whileothersmilkmaintenancecontractsandupgradesonsoftwaretheyhavealreadysold.Thesesmallervendorsmighthavereachedtheirsell-bydate,fortheenterprisesoftwareindustrywillconsolidateascustomersbuyproductsfromfewervendors.Onecompanyweknowrecentlyraiseditspreferredsupplier抯shareofitssoftwarebudgetto70percent,from10.Thissortofdecision梑ynomeansunusualamongsoftwarecustomersthesedays梚sgoodnewsforlargervendors,whichfindsynergiesinsellingbundledapplications,suchasenterprise-resource-planningorsupply-chain-managementsoftware.Butitisbadnewsforsmallcompanies.Thebigwillgetbiggerinenterprisesoftware,thoughnotprimarilythroughacquisitions,becausethedifficultyofintegratingtheproductsoftwomergingcompaniescanmakethepricetoohigh.Suchcompaniescan抰simplypasteanewbrandnameonanacquiredlineandexpectittoworkseamlesslywiththeirexistingproducts.Softwaremustgenerallyberewritten,oftenextensively,toworkwithabuyer抯platform梐requirementthatreplicatesmuchoftheacquiredproduct抯R&Dcost.Companiesthathopetocreatecostsynergiesthroughacquisitionsbyremovingredundantselling,general,andadministrativeexpensescanencountertechnical-integrationcostssohighthatadealmakesnosense.Furthercomplicatingplanstoconsolidatearethedifficultiessomesoftwarecompanieshaveexperiencedtryingtoselltheirproductsintoanewlypurchasedcustomerbase.Companiesthatbuyothercompaniestoobtainaccesstotheircustomersratherthantheirtechnologyhavehistoricallyunderperformedthesectoraverage.Sotheupshotmightbeanindustrystructurefamiliarfromotherpartsofthetechnologysector:ecosystems,oreconomicwebs,1inwhichsmallervendors,withoutovertownershiporallianceties,orbitlargercompaniestodeliverajointvaluepropositiontocustomers.Inthisscenario,smallandmidsizeenterprisesoftwarecompanieswillhaveachoice:beacquired,besqueezedout,orremainindependentandjointheecosystemsofbiggerrivals.Thosethatremainindependentneedtochoosetheirpositioncarefully,todecidehowtheywillgetfairvaluefortheircontributions,andtodefendtheirmarketpositionbyconstantlyaffirmingtheirdistinctiveness.Forsomeproductcategories,thisapproachcouldevolveintoatieredmodelsimilartothatoftheautomotive-supplierindustry,wheretop-tiercompanieshaveaccesstocustomersandlower-tiervendorsactassupplierstothelargerplayers.Itremainstobeseenwhichpartywillbearthecostsoftechnicalintegration,butitwilllikelybetheonewithlessleverage梪suallythesmallercompany.Somesmallcompanies,however,willdononeoftheabove.Instead,theywillsurviveoutsideecosystemsbyexploitingnichemarketsorbysubsistingonmaintenancecontractsandupgrades.Aninstalledcustomerbasewillkeeptheseindustryorphansalivewhileofferinglittleopportunityforgrowth.Notes:KenBerrymanisaprincipalinMcKinsey抯SiliconValleyoffice,andJimSeabergisaprincipalintheDallasoffice.1JohnHagelIII,Spiderversusspider,TheMcKinseyQuarterly,1996Number1,pp.4?8.