The Israeli Software Industry: Analysis of the

advertisement
GLOBALIZATION AND FIRM DYNAMICS IN THE ISRAELI
SOFTWARE INDUSTRY: A CASE STUDY OF DATA SECURITY
This paper focuses on some microeconomic aspects of the process of globalization,
namely the patterns of growth of very successful Israeli companies in a specific but
very important IT area-Data Security. The background to this focus is the process of
globalization of the last two decades of the millenium; the associated surge of high
tech industries in many countries worldwide (including Israel); and the emergence of
a new type of high tech cluster in Israel spearheaded by the Software and hi tech
Communications Equipment areas (of which Data Security is part).
The success of Israel’s high tech IT sector during the 90s would not have been
possible without the continued deepening of the globalization process during the last
decades of the millenium and of the continued IT technological revolution.
Globalization of technology & knowledge, organizational forms, capital markets, and
skills created new opportunities, which some countries more than others (or earlier
than others) happened to exploit due to their flexibility and capacity to adapt. Israel
was one of the first countries out of the US, which was fortunate enough to have
exploited such opportunities, at least during the 90s. Evidence of this is the fact that
US venture capital companies invest in Israel more then in any country out of US.
Israel’s success with high tech and its ‘reconfigured cluster’ seems to have
been linked to the following factorsThe “Silicon Valley” model of IT high tech has and is diffusing to other countries;
Strong links to US (and to some extent other countries’) Asset and Capital
Markets were forged;
Significant Foreign Investments into Israeli hi tech, particularly in IT areas, have
occurred;
Strong Personal, Professional & Business links and networks have been forged
between Israeli engineers, managers, investors and their counterparts in the US (to
some extent also elsewhere).
Objectives of Paper
There are three main objectives of this paper:
1.
An analysis of Firm Dynamics in the Data Security Area of Israel’s Software
Industry.
1
2. An analysis of the Emergence and Development of the Data Security Area itself.
3. Theoretical (and some potential Policy) Implications.
The central focus of the paper is the dynamics of growth and
internationalization of companies, which we trace through a combination of in-depth
interviews, assembly of additional information on each one of the 19 companies, and
conceptual (Appreciative) theory to build growth profiles of very successful
companies. The conceptual framework is summarized in figure1.
Figure 1: Company Growth and Potential Impacts
Cluster effect
Firm
Outcomes
Phases of
Growth
Growth Profiles
Initial Conditions
Entrepreneur Background
'Initial' invention
Performance
"Social" Impact
Firm
Strategy
Policy
2
Sample / universe
The sample included 19 firms, which comprised the total Universe identified
at the time of the research. We have distinguished three stages in the growth of the
industry- stage 1 (early 1980-1992), stage 2 (middle, 1992 -1996) and stage 3
(growth, 1996 - 1999). We also distinguished between three levels of (private)
performance of individual companies according to level of sales and market
capitalization (at 10/1999). This include: Very successful companies (four, two
founded in Stage 1 and two in Stage 2); successful companies (6), and other (which
includes failures, promising new companies, and struggling companies). Very
successful companies comprised almost 90% of total sales and market capitalization
of the whole industry.
Table 3a: FIRM PERFORMANCE CATEGORIES
VERY
MODERATELY
OTHER (O)
SUCCESSFUL (SS)
SUCCESSFUL (S)
CheckPoint
Com2
Emerging
Failure
Struggling
Memco
Com10
Com11
Com12
Com7
Aladdin
Com15
Com5
Com6
Com13
NDS
Com1
Com9
Com14
Com4
Com8
Com3
Table 3b: Companies by Performance Category and Foundation Date
Stage1
SS
S
A: Early (1980-1992)
2
2
B: Middle (1992-1996)
2
2
3
2
6
6
9
C: Growth (1996-1999)
Total
4
O
1The current stage of the industry, which began in 1999, lies beyond the scope of this paper. This
stage involves creating a unified platform enabling interoperability of all devices. The SVN platform
created by CheckPoint is the leading example of this.
3
Growth Profiles
The focus of the study is the four successful companies and more specifically
their growth profiles a combination of growth phase sequences and strategy. This is
justified for three reasons the first being the fact already mentioned that these
companies represented such a high proportion of the industry so that their behavior
would fairly closely represent that of the industry as a whole. The other two reasons
relate to the cluster and to the policy perspective adopted in the paper. On the one
hand, the existence of successful companies having gone well beyond the start-up
phase is important for other younger & smaller companies for a number of reasons
such as demonstrating the possibility of becoming a global company, managerial
spinoffs, cooperation etc. These cluster effects of very successful companies (which
our research indicates represented part of their social or economy-wide impacts) seem
to be of extreme importance in this era of globalization. Finally our research
reinforces the view that a strategic priority of technology, innovation and industrial
policy of Israel is the creation of large global companies particularly in high-tech
industries. This country is SU-intensive but it is relatively weak in leveraging its R&D
capabilities in terms of value added and employment domestically, partly because of
the absence of large, domestic companies. Thus the identification of profiles of
growth of very successful companies is a paramount priority of policy-relevant
research of the type we are undertaking here.
The very successful profile of growth involves a main sequence with an IPO
undertaken at the beginning of the first post SU phase of company growth--the market
penetration & product line enhancement phase (phase two of company evolution). See
Figure 2. This main sequence involves three out of the four very successful
companies. In all cases, the IPO not only enabled market penetration but also was an
important milestone in the consolidation of all companies. There are two patterns of
consolidation (phase 3 of company growth) under the main sequence: an indigenous
consolidation pattern (CheckPoint and Aladdin); and being acquired by a large
foreign company (M&A1, the case of Memco). Both variants involve mergers and
acquisitions with/of other companies--domestic, foreign or both. The difference
resides in potential social impacts. There are reasons to believe that they are higher in
the domestic consolidation case than in the other case where the local Israeli
Company was acquired by a foreign multinational. This because of the potentially
stronger cluster effects of 'domestic' consolidation compared to those of the post
4
acquisition phase of acquired companies (in particular truncation of the process of
accumulation of assets related to markets, marketing and clients/customers). Finally, a
fourth very successful company -NDS- was acquired by a foreign multinational early
in the first post SU phase. In this case M&A1 substitutes for an IPO. IPO in the post
acquisition phase of an acquired company plays a different role in company growth
than that played by an independent company. In the independent company case it
seems to be part of a strategy of market penetration and it accelerates the
accumulation of assets including reputation, visibility etc and other factors which set
the stage for successful consolidation.
The upshot is that there seems to be a generic profile of growth for very
successful companies in the Data Security area, with variations depending on whether
or not the company was acquired and at what stage it was acquired. There also seems
to be differences in potential impacts between the two broad categories of company
consolidation - indigenous and acquisition by others. This statement is subject to
caveats: it depends on what happens in the post acquisition phase of the nonindigenous case; and recognition of the fact that not all companies in all areas can
expect to survive let alone be very successful through the indigenous path.
An important factor of very successful indigenous companies is there being
"key agents" in the growth of other companies by demonstrating the possibility of
succeeding without selling out to others, and by other more specific aspects of their
successful strategies which other companies can emulate. Another precondition
relates to the values and preferences of entrepreneurs namely the desire to create
local, global companies and to "create real companies that solve real problems" (in
contrast to creating companies in order to sell them to others). The background of
entrepreneurs is also important in successful and very successful companies relative
to others, in particular the greater frequency of Army and Hobbyist backgrounds and
the presumption that company background was also more adequate in the former than
in the latter cases.
5
Figure 2: The Phase Sequence of Very Successful Enterprises
M&A2
First Big Sale or
Marketing
Contract
Indigenous
Consolidatio
n
IPO
A1
M&A1
A1
M&A1
IPO
A1
A1
Phase1
Product Development
Phase2
Market Penetration &
Widening Product Line
Phase3
Consolidation
Explanation
The upper Main Sequence leads to Indigenous Consolidation (CheckPoint, Aladdin)
or to Foreign Acquisition of the Israeli Company --M&A1 (Memco).
The lower Special Case involves M&A1 early in Phase2 (NDS).
Notation
M&A2 represents acquisition of other companies (domestic or Foreign) by the
Israeli company.
M&A1 is acquisition of the domestic company by a foreign one.
6
Implications and policy
The analysis has generated some additional implications concerning the
impact of “Globalization". The main ones are:
1) For those countries like Israel where the Globalization process in combination with
‘national adaptation’ has facilitated access to world asset and capital market and in
comparison with the situation prevailing during the 80s - the private return to
inventors/SU investors is less dependent on acquiring or accessing ‘complementary
assets’. Globalization also generates additional means for acquiring these assets (e.g.
through IPO or M&A); and large private returns may coexist with weak or low
economy wide gains since implementation of the ‘outputs’ of R&D may easily take
place abroad;
2) IPOs have direct and indirect effects on company ‘asset accumulation’. The former
relate to Reputation, Management Skills and Capabilities, and Social (Relational)
Capital; the latter are the cash and shares which may enable a promising SU company
to access complementary assets in its target market;
3) IPOs are part and parcel of the ‘Growth Strategy’ of a company rather than simply
a mechanism for “exiting” of investors, VCs etc.
A major potential implication of the analysis of this paper is that very
successful companies, which remain indigenous, may play important roles in
enhancing the social profitability of domestic inventions, R&D and SU companies.
We are not saying that all good or promising companies should remain indigenous, far
from this (also, some have no choice but to be acquired or perish). What we are
saying is that most probably a mix between the two types of very successful
companies--including a solid representation of global, indigenous companies-- is
adequate at the current stage of the Israeli hi tech cluster (were very few IT companies
beyond 800 M$ turnover exist and were widespread M&A1 activity is taking place).
Note that the broader institutional & taxation context and the existing “environment
for business” are not and cannot be neutral with respect to this issue. So even those
who would like ‘market forces’ to decide could not be sure that the actual ‘outcome’
is adequate let alone optimal. We are also Preliminary analysis of the very successful
companies suggest that both “R&D leverage” effects and “Spillovers” of Check Point,
Aladdin and Memco (till its acquisition by Computer Associates) are high, compared
to those of the remaining company (and compared to the post acquisition phase of
7
Memco). Both types of effect depend to some extent on the accumulation of
‘complementary assets’ such as those related to markets, marketing and other clientrelated assets; and to production. A typical (although not unique pattern) post
acquisition situation is one where the previously independent Israeli company is
transformed into an R&D laboratory for the its large multinational parent; whereas
companies which remain Israeli perform a large spectrum of post R&D activities with
important linkages to the National Economy and to Employment (not only of R&D
personnel but of other personnel as well). Moreover, the three companies mentioned
above (Memco till its acquisition) made enormous contributions to other companies
of the Israeli IT hi tech cluster through a variety of mechanisms. These include
facilitating ‘scaling up’ through e.g. vital help in marketing (through OEM
agreements or other means); through investments in and acquisitions of other younger
companies; through the reputation effects they generated and the business models
which they offered to these other companies, and through participation in
CheckPoint’s OPSEC forum. While most of these effects are qualitative they are
nonetheless real and, pending additional research, have very important policy
implications.
The major potential policy implication pertains to the ‘Strategic Dimension’ of
Innovation and Technology. Side by side with the need of a reconfigured pattern of
R&D
support (which considers existence of VC companies) a major strategic
objective should be ‘growing large, indigenous companies in the IT area’. This
objective is presumably important not only for Israel but for other small,
technologically advanced economies. At the operational level, this implies first and
foremost, supporting the emergence of VC and continuing to support companies’
R&D through subsidies or other means at least till a well developed VC industry is
established (in Israel such an industry is quite well developed); institutional and tax
reform concerning mergers and acquisitions among local companies; adequate
regulation of Telephone, Cable, Satellite, Internet and Mobile services; a privatization
strategy of the national Telecom company oriented to the above mentioned strategic
priorities; the full implementation of ‘dynamic’ competition policy with a world
market perspective, etc. If these aspects of policymaking are geared to the above
mentioned priorities, then they a) will generate the possibility of ‘International
Expansion’ (end of Phase 1, beginning of Phase 2 of company growth) of good
Israeli SU IT companies through facilitating access to world asset and capital markets;
8
b) will create at least ‘neutrality’ with respect to the IPO or M&A1 option of such
companies at the end of their SU (and beginning of Market Penetration) Phase; and c)
may generate a measure of ‘level playing field’ vis a vis the context under which
counterpart or competitor companies in other countries may operate. Complementing
these measures at the Consolidation Phase would see other actions such as the
reinforcement of the Magnet Program in Israel which supports cooperative, generic
research; and creating conditions to facilitate Strategic Partnerships with major
international players in the principle world IT markets.
Further work must be undertaken to consolidate the policy implications of the
analysis2. We believe that the links insinuated or surmised from this paper between
microeconomic analysis & conceptual theory on the one hand; and policy analysis on
the other are important in fully moving to a more explicit, dynamic and systemic
Innovation and Technology Policy in this country.
2
A separate document further develops the policy implications of the research. See Avnimelech,
Gayego & Teubal 2000: "The Role of Academic Research in Innovation and Technology Policy
Formulation in Israel: General Principles and an Illustration from a Study of Very Successful Hi Tech
Global Companies", typescript.
9
Download
Related flashcards
AOL

38 Cards

ABC Kids

42 Cards

Create flashcards