I wrote this report as part of a Strategic Management unit I did. I scored really well for this report, although re-reading it here the language is a bit cringey, I guess academic reports have a particular writing style (where you try to cram in as many marks as possible) that feels unpleasant in any other context.
Regardless, the process of researching and then writing this report was incredibly valuable to me, I realised that in small business talent & hard work isn't really enough, because it's strategic positioning which will ultimately determine your potential profitability.
Firm and Industry
This report aims to develop a mission statement and key strategic objectives for Xero Limited. The firm was founded in New Zealand in 2006, and has enjoyed notable success with it's browser based accounting software in a number of geographic markets.
This report confines the relevant industry to those firms providing accounting software to Small or Medium Enterprises (SMEs) within Australia. Key participants in addition to Xero include firms such as MYOB, Intuit, Sage, and Reckon. Product offerings in this industry include both desktop solutions and browser based solutions.
New entrants to this industry in recent years have increased the level of competition, providing a challenging environment for future growth.
Macro Environment Analysis
In the context of this report the term macro environment refers to those factors which may impact the entire industry. The PESTEL framework as described by Witcher and Chau allows identification of factors representing opportunity or risk (Witcher & Chau, 2010, p. 91). Rather than a rigorous discussion of each element in the mnemonic, this report explores only those features of the macro environment of significance to the strategic management process, notably no compelling Social or Environmental features are existent.
The 2017 OECD Economic Survey notes that whilst Australia has enjoyed consistent output growth for 25 years, "merely maintaining long-run average productivity growth jeopardises this success" (2017, p. 5). The health of the underlying economy within which the industry operates is an important consideration for macro environment analysis given the strong links between potential growth of the industry and that of the economy, however in this instance the available information suggests no strategically significant growth nor decline.
Rates of business investment are in decline, with a net reduction in business investment of 16.2% in the 2016 financial year as compared to the prior (Department of Industry, Innovation and Science, 2016, p. 20). This reduction means that firms may face difficulty in acquiring equity funding within Australia..
Number of Actively Trading Businesses
The number of actively trading businesses in Australia increased by 2.4% in the 12 months ended 30 June 2016, notable given that the preceding 3 years showed an average decline in this number of 0.3% per year (Australian Bureau of Statistics, 2017b). High rates of underemployment (Australian Bureau of Statistics, 2016) and low wage price index growth (Australian Bureau of Statistics, 2017a) will encourage the foundation of SMEs in the short to medium term. Increasing numbers of SMEs supports growth in the relevant industry through increased numbers of potential customers.
Corporate Income Tax Rates
Australia's corporate income tax rate is progressively reducing. Where previously this rate was 30%, the rate is currently 27.5% for eligible entities, and will reduce to 25% for all corporate entities by the commencement of the 2027 financial year (Treasury Laws Amendment (Enterprise Tax Plan) 2017 (Cth)). This reduction will support increases in the number, size, and longevity of SMEs, which will provide growth in the potential market for this industry. In addition, reduced income tax rates may make the industry more attractive to new entrants.
Access to Crowd Sourced Equity Funding
Crowd Sourced Equity Funding (CSEF) is becoming more viable given the recent Corporations amendment (Crowd-sourced Funding) Act 2017 (Cth). Whilst this may support new businesses who may consume the products of the industry in question, this effect is insignificant. However, improved access to CSEF may reduce barriers to entry for industry participants.
Accelerated Depreciation of Intangible Assets
A proposal to allow depreciation of intangible assets over self-assessed useful life is currently under consideration by the normal parliamentary process (Tax and Superannuation Laws Amendment (2016 National Innovation and Science Agenda) Bill 2016: Intangible asset depreciation (Cth)). This proposal has not yet passed into law. Intangible assets can include research and development (R & D) costs, and software development costs. Currently, an intangible asset's useful life is defined by law, the ability to self assess useful life means that firms can claim higher deductions in the short term where appropriate. Therefore, this amendment would effectively reduce the capital required by industry participants for R & D activities, and software development activities, by bringing forward associated tax credits.
Rapid Adoption of Mobile Technology
The current state of mobile technology supports functionality like the capture, storage, retrieval of financial information. Intuit's Self Employed study as cited by Accountants Daily (Bullock, 2017) reveals that this functionality is highly desirable amongst small businesses. SMEs are adopting mobile processes like issuing invoices, and consider the benefits to include cost savings, flexibility, and time saving (Yamine, Ellis, Pedic, & Tan, 2014, p. 18).
This change in user behaviour represents a challenge to existing firms as feature offerings on mobile devices become important differentiating factors for potential users. Many users may choose accounting products entirely on the basis of the usability of their software on hand held devices.
Emergence of Cognitive Technologies
Cognitive technologies are those which automate tasks requiring cognitive skills like reasoning, and perceptual skills like reading (Schatsky & Muraskin, 2015, p. 115).
A compelling application of these technologies in this industry is the automation of classification of invoices, receipts, and other source documents (Hodgson, 2017), however the current state of the technology is far from mature and consequently high levels of human involvement in these processes is yet required.
Given that these technologies have the ability to reduce an enterprise's human resource requirements in performing processes like bookkeeping (Galarza, 2017), they represent significant value to the market.
Increased Compliance Requirements for SMEs
Compliance requirements for SMEs are likely to increase, which will increase those entity's demand for accounting software. Regulatory bodies conduct taxpayer audits where they identify significant risk of misstatement or fraud, but their capacity to undertake audits is limited by the associated cost. It is generally understood that "as audit evidence increasingly becomes more digitised, [cognitive technologies], combined with work flow automation, enable auditors to do significantly more analysis in less time" (Raphael, 2017, para. 7) It is therefore reasonable to conclude that taxpayer audits will be undertaken much more readily in the future than they have been historically.
Macro Environment Summary
|Number of Actively Trading Businesses||++|
|Corporate Income Tax Rates||+|
|Access to Crowd Sourced Equity Funding||+|
|Accelerated Depreciation of Intangible Assets||+|
|Rapid Adoption of Mobile Technology||++|
|Emergence of Cognitive Technologies||++|
|Increased Compliance Requirements of SMEs||+|
Clearly the general outlook for the industry is positive, however in developing a mission statement and key strategic objectives the drivers of particular relevance are those which directly support increased value within the industry. These drivers are increased numbers of SMEs, adoption of mobile technologies, and cognitive technologies.
Consideration of the factors presented in Porter's 5 forces model (Porter, 1979) provides insight into the level of competition in the industry.
Threat of New Entrants
The threat of new entrants is significant as foreign vendors seek to take advantage of the Australian industry's favourable conditions, and local vendors enjoy political support to improve their product's feature sets in order to enter this industry.
Recent entrance from Intuit in 2013 (Redrup, 2017) and Sage in 2015 (Wallbank, 2015) demonstrates the trend of multinational software providers engaging with the Australian market. Whilst the largest multinational providers are already represented in this industry, it's likely that smaller providers will participate in future. There are a number of smaller vendors currently engaged in South East Asian markets which may pursue market share in Australia, including Pymlo, Netiquette and Megi.
Firms offering products to associated markets could move into this industry. There are a number product offerings targeted at market segments. These products have limited features suitable for their demographic and therefore do not currently participate in Xero's industry, examples of these products include Bridge and Tradiepad. Potentially vendors of these products could expand features and leverage their existing user base to become significant participants in this industry. It is notable that political support for this type of transition exists in the form of accelerated intangible asset depreciation and better access to crowd sourced equity funding.
Threat of Substitutes
The threat of substitutes is minimal as substitutes are simply not viable for many SMEs.
A common substitute to industry products is to confine financial information activities to those which are directly required for revenue or compliance, and forego all other activities. For example, a sole trader engaged in providing trade services may limit their bookkeeping activities to issuing hand written invoices, and simply provide all relevant documentation to their accountant each quarter which the accountant will use to meet compliance requirements like lodging a quarterly activity statement. This may be a viable substitute for some small businesses, but becomes progressively less viable as business size increases.
Bargaining Power of Suppliers
Suppliers have some bargaining power, although not at strategically significant levels.
The largest resource requirement of this industry is information storage and delivery infrastructure. All key industry participants rely on suppliers to provide this infrastructure, and each firm relies exclusively on a single supplier. The market for this infrastructure is an oligopoly with only several suppliers possessing the requisite capabilities, these include Amazon Web Services, Microsoft Azure, and Rackspace. Switching costs are significant as software may need to be augmented to switch platforms, however the cost is not preclusive, as evidenced by Xero's migration from Rackspace to Amazon Web Services in 2016 (Ritchie, 2016).
Bargaining Power of Buyers
Buyers have minimal bargaining power due to switching costs and the imbalance between numbers of buyers and vendors.
Buyers face significant switching costs to migrate between accounting software products. SMEs will have hired personnel and built processes around the functionality offered by their current software provider. Although features may be comparable between software products, subtle differences mean that various products are not perfectly interchangeable. These costs can be classified as post switching behavioural and cognitive costs (Jones, Mothersbaugh, & Beatty, 2002, p. 443).
This market comprises a multitude of buyers while the industry contains very few providers, as such individual buyers have very little bargaining power. In some respects accounting firms are key decision makers as they represent a conglomerates of buyers, but even were a large firm to encourage clients to switch away from a given product, the impact on that vendor would be barely perceptible.
Intensity of industry rivalry
Rivalry amongst industry participants is existent, though largely limited to improprietous commentary. Industry participants take opportunities to highlight competitors weaknesses and draw favourable comparisons.
Intuit’s product is a challenger to Xero in Australia, while having the inverse position in the United States (US) industry. Intuit's Richard Preece was cited by the Financial Review suggesting that Xero's reporting is structured in such a way as to obfuscate poor performance in the US market (Redrup, 2017).
Reckon One is a low price competitor, and in response to a price increase from Xero issued a media release, with CEO Clive Rabie paraphrased by Accountants Daily "Xero is price gouging and the move will hurt small business in Australia" (Masterman, 2016). This media release is notably missing from Reckon's archive, implying Xero may have responded through legal channels issuing a cease and desist letter or court order (Reckon Limited, 2016a).
Media releases often directly espouse favourable comparisons between firms and their competition. When Reckon launched payroll functionality they took the opportunity to directly highlight differing pricing and discredit others with "tacked-on solutions" (Reckon Limited, 2016b).
MYOB is an incumbent firm in the Australian industry, with Xero considered an innovative challenger. In response to Xero's migration to Amazon Web Services infrastructure in 2016 MYOB's Adam Ferguson took the opportunity to undermine their position, saying "It's funny to hear Xero carry on like it's just discovered the platform" as cited by CRN Australia (Foye, 2016).
Industry Environment Summary
The profitability of this industry is above average. Some rivalry between competitors and the threat of new entrants is balanced by the lack of substitutes and the limited power of buyers and suppliers.
Consideration of the five key questions of business strategy as defined by Hubbard, Rice, and Galvin (2015, p. 35) allows construction of strategic objectives within the firm's strategic context.
Xero's core business is the provision of accounting software to SME's in a number of geographic markets including Oceania, North America, South East Asia, and Europe. The firm desires the maximum sustainable level of growth in order to achieve and maintain a dominant position in these markets. The generic strategy for Xero Limited, in common with all key market participants, is Best Cost/Value (Hubbard et al., 2015, p. 189), seeking differentiation through quality and ease of use, and low cost per user through maximal market share. However, it is more illuminating to consider Xero’s product leader value discipline (Treacy & Wiersema, 1994, Chapter 6), whereby the firm seeks to deliver compelling benefits through it’s products.
Increase Multi-device Users
The conversion of browser interface users to multi-device users is a viable pathway to maximising Xero's presence in the mobile accounting arena. Many Xero users may have never installed or used one of Xero's mobile apps, never having noticed a need to do so. Use of Xero's mobile app is a very valuable marketing opportunity, as users interact with apps in public settings like checkout queues and cafes. Having existing users promote Xero's mobile app in this way promotes this functionality to other potential users.
Achievement of this objective would support the achievement of a dominant position in the mobile accounting software space, whilst discouraging users from switching away to new entrants in this space as they become more enmeshed in the Xero ecosystem.
Document Storage Features
Maximising the proportion of users utilising Xero's document storage features supports a leadership position in cognitive technology innovation. Every document uploaded and subsequently processed by users is a valuable learning commodity for any cognitive processes the firm may develop. Xero is well positioned to acquire this data, but adopting a proactive position will significantly improve the quantity and quality of the data captured. Presently Xero's document capture process and interface is rudimentary, and users frequently seek this functionality from third party providers such as receipt-bank. Improving this process and moving these features in house will be an important step in achieving this objective.
Maximising document storage utilisation is well aligned with increasing multi-device users, as mobile devices represent the most convenient means by which many forms of supporting documentation can be captured. For example, a user taking a photo of a fuel receipt at a service station is significantly more convenient than collecting such documents to later scan them.
Xero's primary reason for existence is to create value in client businesses. However, the mission statement should correctly identify users as people, rather than businesses.
From a user's perspective, the firm's primary strategic objectives are concerned convenience and value. The real benefit to users of mobile functionality is the freedom to interact with their financial information anywhere at any time, and the convenience that represents. The real benefit to users of cognitive technologies is the value it will add to their financial processes by reducing time requirements.
With these considerations in mind, the proposed mission statement is "To create value within businesses by providing people with tools to make business processes easy, elegant, and convenient."
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