Threat of New Entrants
This relates to the barriers that are present along with the reaction received from existing competitors that an entrant faces in a new industry (Porter 7). There are seven things to consider Economies of Scale, Product differentiation, Capital Requirements, Switching costs, Access to distribution channels, Cost disadvantages independent of scale and Government policy.
Economies of Scale
This plays a significant part as could computing requires greater scale due to a much bigger upfront investment in infrastructure. However, with the advancement of virtualization platforms, particularly vBlock (vce.com), firms can now start small and scale out as needed, thus, quickly capturing a return on their investment. This investment may play a big or small part depending on if the firm is a niche player, challenger, leader, or visionary (Gartner).
ECM companies looking to compete against Microsoft, Oracle, IBM, Open Text, EMC and Hyland may find that they are at a significant cost disadvantage, as these firms often tend to have high excess capacity and established operations. These firms can share operations and are often multi business. They also tend to enjoy joint costs, as a Hotmail customer may be the same that uses SharePoint or LiveMeeting. A byproduct of economies of scale is vertical integration as we can see with EMC and the VCE partnership. With networking provided by Cisco, virtualization by VMWare and storage by EMC, VCE products have little that needs to be purchased from outside vendors.
This really just boils down to two main categories: brand identification and customer loyalties (Porter 9). Customers that purchase EMC Celerra or Isilon products would naturally be inclined to utilize the breadth of Content Management products that EMC offers. The same holds true for customers using Oracle back-end database or Microsoft SQL server.
As customers look to a public or private cloud offering, loyalties may start to deteriorate as switching costs are very low for subscription based services. The functionality, cost and time to market comes into play as anything past the user interface becomes less important for the customer. Having a breath of products ranging from information capture to information governance and final disposition is highly important.
These generally tend to be extremely high as the firms needs to set up an entire an infrastructure to support hundreds of enterprises. Given that Microsoft, Oracle, IBM, Open Text, EMC, and Hyland are all multi-billion dollar corporations with large amounts of cash on their balance sheets, capital requirements would be met easily. As discussed earlier, companies such as Microsoft, Oracle, IBM and EMC may find it easier to utilize existing or set up new cloud environments.
Investing in an enterprise content management platform requires long-term commitment as the switching costs are extremely high. This assumption is based on the fact that firms own the entire infrastructure that hosts their enterprise. The high capital investment disappears as SaaS offerings are embraced. The analogy of a house versus apartment can be used. People that own houses find it extremely difficult to switch homes yearly or on alternate years, however, apartment renters find it beneficial and convenient to shop annually for better rates.
Thus, if ECM companies are looking to embrace cloud offerings, they should understand that they constantly need to monitor customer satisfaction and continually improve the value that is delivered.
Access to distribution channels
Companies that have a strong foothold with existing sales teams would find it easier to cross sell/up sell to existing customers. This is an area where multi business companies thrive due to networking effects. Again, well established companies will find it easier to leverage existing sales staff while niche player may be barred from certain distribution channels. Existing contracts and partnership also make it difficult for a new entrant to access current distribution channels.
Cost disadvantages independent of scale
Established firms have cost advantages such as propriety product or technology (Porter 11). They also have IP kept through patents or personnel. A new entrant would face a huge learning curve. Costs often decline as workers improve methods, products require less R&D and more maintenance, pitfalls are avoided, and better performance is achieved due to experience effects.
The threat of new entrants is High as economies of scale don’t directly apply to cloud offerings as they would to a commodity such as wheat. Product differentiation is Low as all firms usually have a portfolio of products that address various content management needs. Capital requirements are High due to the upfront costs of setting up an infrastructure. Switching costs are Low because customers are not bound by existing investments. Access to distribution is Low as established players already have relationships built. Other costs are extremely High as existing firms have efficient personnel that are experienced in their realm of business. Looking purely at threat from new entrants, it seems likely that other firms could enter the cloud ECM market.