Recently, Microsoft introduced Windows Phone 7 Mobile software. This is all new software that Microsoft hopes will stop its slide in market share. It is going to have tough sledding.
Until this introduction, Microsoft’s market share in the mobile software business was dropping off a cliff. The company was one of the early entrants into the market. In 2004, it owned 22% of the market. By 2009, its share was down to 9%. Today it is about 5%. Microsoft was quickly fading away. But maybe the new software can help.
For a bit of perspective, we have to explain that there are five separate players involved in this marketplace: the operating system developers, the phone manufacturers, the wireless carriers, the software application developers and the ultimate users. Each of these entities are in separate businesses and represent separate competition. Microsoft plays in the market exclusively as an operating system developer. That’s what Windows Phone 7 is. The Google Android system is another stand-alone mobile operating software platform. So has been Hewlett Packard’s Palm mobile operating software. Three other competitors offer their operating software only in combination with their handset hardware. These include Nokia, with the Symbian operating system, Research In Motion’s Blackberry products and Apple’s iPhones.
The market share ranking today among those competitors in total operating software starts with Nokia’s Symbian, followed by Android, then Blackberry and Apple. Each of these has a market share that are multiples of Microsoft’s current share. Microsoft is fifth, followed by Palm and others.
The new Windows Phone 7 software is a wholly new product. It is completely different than the previous Microsoft mobile software. So different, in fact, that none of the thousands of applications written for the previous Microsoft software will work with Windows Phone 7. The company must start from scratch with applications.
Consumers love applications and make many of their buying decisions on the basis of these applications. (See the Perspective, “When to Compete on Features” on StrategyStreet.com.) Today, Apple has about 250,000 applications, followed by Android with about 70,000. The differences between the two are probably much less than these numbers would indicate because most of the popular applications are available on both platforms. You can see this in the marginal purchases. Android garners more of the current new purchases than does Apple. So, for all practical purposes, Apple no longer owns a significant application lead on Android.
Windows Phone 7 faces a real hurdle with applications. In some ways, it offers a few benefits over the Android and Apple operating systems. For example, it works off of “tiles” that enable a user to get information somewhat faster than in the Android and Apple software. It works easily with Microsoft Office software and it enables gamers to connect to online games easily. These are modest innovations at best, and likely to be followed by others quickly. For example, Motorola already produces software for its phones that pretty much duplicates Microsoft’s “tiles.” Apps are the big problem.
If you are an applications developer, Microsoft would likely be far down your list of the companies for whom you would write new application software for a smart phone. Android and Apple would lead the pack. Nokia, Research In Motion and others offer more current customers than Microsoft but pose difficulties for developers. Microsoft would fall below all these firms. Microsoft has to solve this problem quickly.
Application developers are also likely to be leery of Microsoft and its continued presence in the market. Not only has the company lost share, but it introduced a software platform called Kin in the spring of 2010 aimed at young people, between 12 and 20. This product did not stay in the market even two months. So developers are likely to hold fire on their application development for the Windows Phone 7 platform until they are relatively sure that the product will succeed.
Microsoft is backing its Windows Phone 7 introduction with a $100 million advertising program emphasizing the ease with which a user can get to the information most important to the customer. This seems to me to miss the mark. This advertising investment is a Convenience innovation that advises the customer why the Microsoft system is faster and, therefore, better. (See “Video 15: Definition of Convenience” on StrategyStreet.com.) But it seems that most of the smart phone purchases today are the result of other current users’ recommendations and demonstrations. This is a Reliability innovation. These current users are apt to emphasize the Function benefits of their phones rather than the speed of access to information.
Microsoft might have spent this money differently. It is already paying some developers to create applications for its platform. My guess is that their $100 million might have been much better spent paying for applications, where Microsoft is likely to fail on the basis of lack of Functions rather than paying for the Convenience innovation of advertising.
Showing posts with label Hewlett Packard. Show all posts
Showing posts with label Hewlett Packard. Show all posts
Thursday, October 28, 2010
Monday, August 16, 2010
The Decline of an Industry Leader
In a tough, highly competitive market place, the avoidance of Failure and a company’s reputation for Reliability are critical to long term success. (See “Video #14: Definition of Reliability” on StrategyStreet.com.) Dell is an example.
For years, Dell was the paragon for the personal computer industry. It had good computers with a build-to-order business model that took in cash before the company had to pay suppliers. Its low-cost business model involved maintenance of low inventories and tight control of its suppliers. Then the wheels came off.
From 2003 to 2007, Dell shipped a number of its mainline personal computers with serious flaws. The facts have come out recently in court documents in a suit filed by a customer against Dell claiming that these faulty computers cost the customer a good deal of money. It seems this customer was not alone.
Dell’s problems showed up because a supplier shipped it bad capacitors. An Asian company, Nichicon, produced bad capacitors, which Dell included in its motherboards on nearly 12 million computers shipped to customers from May 2003 to July 2005. A study of these computers suggested that these capacitors would cause problems in Dell computers 97% of the time, if the computer were used over a three year period.
Dell did not handle this situation well. It placed cost control ahead of customer welfare. (See the Perspective, “Cutting the Right Cost” on StrategyStreet.com.) In some cases, it replaced bad motherboards with other bad motherboards. In other cases, customer service and sales employees went out of their way to conceal these problems. Dell told some of its customers that the customers were at fault for the failing computers because they had over taxed the machines. Nor did Dell recall the faulty computers. Instead, it left it up to the customer to make a complaint before it took action. In the meantime, customers suffered the costs of losing information when their computers failed to function properly. Dell failed its customers and ravaged its Reliability reputation.
Dell is no longer the paragon of the personal computer industry. That mantle now rests on the shoulders of HP and, perhaps, Acer. Dell’s market share has fallen off. In a tough marketplace, the Failure of an incumbent supplier is the cause of most market share shifts in the industry. If an incumbent Fails the customer by refusing to do something that other people can and will do, it will lose market share. Another critical aspect of a company operating in a very tough market is Reliability. The customer has to trust that the company’s products will work, and if they do not work, they will be fixed promptly. Dell at one time had a good Reliability reputation. It gained share on the back of that good reputation. The company has badly frayed that reputation and its failures have caused its loss of market share. (See “Audio Tip #36: The Importance of Customer Retention in Hostility” on StrategyStreet.com.) These failures account, in part, for the share gained of Hewlett Packard.
For years, Dell was the paragon for the personal computer industry. It had good computers with a build-to-order business model that took in cash before the company had to pay suppliers. Its low-cost business model involved maintenance of low inventories and tight control of its suppliers. Then the wheels came off.
From 2003 to 2007, Dell shipped a number of its mainline personal computers with serious flaws. The facts have come out recently in court documents in a suit filed by a customer against Dell claiming that these faulty computers cost the customer a good deal of money. It seems this customer was not alone.
Dell’s problems showed up because a supplier shipped it bad capacitors. An Asian company, Nichicon, produced bad capacitors, which Dell included in its motherboards on nearly 12 million computers shipped to customers from May 2003 to July 2005. A study of these computers suggested that these capacitors would cause problems in Dell computers 97% of the time, if the computer were used over a three year period.
Dell did not handle this situation well. It placed cost control ahead of customer welfare. (See the Perspective, “Cutting the Right Cost” on StrategyStreet.com.) In some cases, it replaced bad motherboards with other bad motherboards. In other cases, customer service and sales employees went out of their way to conceal these problems. Dell told some of its customers that the customers were at fault for the failing computers because they had over taxed the machines. Nor did Dell recall the faulty computers. Instead, it left it up to the customer to make a complaint before it took action. In the meantime, customers suffered the costs of losing information when their computers failed to function properly. Dell failed its customers and ravaged its Reliability reputation.
Dell is no longer the paragon of the personal computer industry. That mantle now rests on the shoulders of HP and, perhaps, Acer. Dell’s market share has fallen off. In a tough marketplace, the Failure of an incumbent supplier is the cause of most market share shifts in the industry. If an incumbent Fails the customer by refusing to do something that other people can and will do, it will lose market share. Another critical aspect of a company operating in a very tough market is Reliability. The customer has to trust that the company’s products will work, and if they do not work, they will be fixed promptly. Dell at one time had a good Reliability reputation. It gained share on the back of that good reputation. The company has badly frayed that reputation and its failures have caused its loss of market share. (See “Audio Tip #36: The Importance of Customer Retention in Hostility” on StrategyStreet.com.) These failures account, in part, for the share gained of Hewlett Packard.
Monday, April 26, 2010
Using Finance to Reduce a Price
Dell is struggling to keep up with HP in the personal computer market. There is one part of the market, though, where Dell remains the clear leader, the small business market. Part of the reason for the company’s success in this market is its financing package. It is more generous with financial support than its competition. It may offer interest-free financing when companies purchase $25,000 or more of new computers. The company offers other creative financing deals. In one of these deals, a customer bought $30,000 of computers on a three-year lease plan that allows the customer to keep the equipment when the lease expires. Overall, Dell says that 22% of its small and medium-size business customers use Dell to finance their purchases. This 22% is up from 17% just two years ago. The company is gaining share by using its financing muscle, despite the chancy economic environment.
Offering financing, whether subsidized or not, is a way of extending the time a customer has to make its cash payment to the supplier. This is a form of discount. In our analysis of several thousand price reductions over the last twenty-five years, we have identified fifteen distinct forms of discount. The offering of financing is one of those forms. Many industries have relied on financing to build their businesses, even in difficult times. The automobile industry has used financing to offer attractive lease rates and payment plans to its customers using captive finance vehicles, like GMAC. GE has used its captive finance arm to finance customers in many of its product categories. In fact, GE has seen its captive finance arm grow into a lender in many markets where GE does not even compete as a supplier.
The home building industry has also used financing creatively. For example, last year Lennar offered special financing with no money down and a 3.625% mortgage rate for the life of its loans on purchases of Lennar’s newly built homes. Subsidized financing helped Lennar win new customers in an abysmal market. (See the Symptom & Implication, “Demand in the industry is falling” on StrategyStreet.com.)
Even small businesses use the extension of financing to build their businesses. Faryl Robin is a New York company that sells high-end women’s shoes. In the expectation that it would build its business with long-time customers in a tough economy, the company offered additional financing. In 2009, it offered retail customers with whom it had a long-term relationship an additional sixty days over its normal thirty day payment period for the customer to make its full payment for shoes she had purchased.
Offering financing, whether subsidized or not, is a way of extending the time a customer has to make its cash payment to the supplier. This is a form of discount. In our analysis of several thousand price reductions over the last twenty-five years, we have identified fifteen distinct forms of discount. The offering of financing is one of those forms. Many industries have relied on financing to build their businesses, even in difficult times. The automobile industry has used financing to offer attractive lease rates and payment plans to its customers using captive finance vehicles, like GMAC. GE has used its captive finance arm to finance customers in many of its product categories. In fact, GE has seen its captive finance arm grow into a lender in many markets where GE does not even compete as a supplier.
The home building industry has also used financing creatively. For example, last year Lennar offered special financing with no money down and a 3.625% mortgage rate for the life of its loans on purchases of Lennar’s newly built homes. Subsidized financing helped Lennar win new customers in an abysmal market. (See the Symptom & Implication, “Demand in the industry is falling” on StrategyStreet.com.)
Even small businesses use the extension of financing to build their businesses. Faryl Robin is a New York company that sells high-end women’s shoes. In the expectation that it would build its business with long-time customers in a tough economy, the company offered additional financing. In 2009, it offered retail customers with whom it had a long-term relationship an additional sixty days over its normal thirty day payment period for the customer to make its full payment for shoes she had purchased.
Thursday, July 9, 2009
Microsoft Gets Price Warnings from its Customers
Microsoft is introducing Windows 7 to replace its unpopular Vista operating system. The company is at logger heads with its PC manufacturing customers over pricing for the new software.
Here are two of the problems. First, Microsoft intends to charge $50 for an entry level version of the operating system, called Windows 7 Starter Edition, which is triple the price the company gets for the cheapest version of Windows out now. Microsoft charges between $60 and $150 for Vista today, but the PC manufacturers can use the older Windows XP for roughly $15 for netbooks, the only growing sector of the PC market. If Microsoft raises the price for the cheapest operating system to $50, the PC makers have to raise their prices or lose all the profits they have on the netbooks. Second, Microsoft plans to charge an additional $200 for the Windows 7 Home Premium edition. This additional cost would increase the price of a mid-range PC by 50%, from around $400 to about $600.
The PC customers have seen significant changes in their market. Competition has increased and prices have fallen. The average notebook, the source of most profits in previous years, has seen a price decline of about $800 from $1400 in 2004. The average notebook now costs less than the average desktop.
These PC manufacturer customers have an important message for Microsoft. (See Video #1: The Two Best Consultants in the World on StrategyStreet.com.) They are Microsoft’s key channel of distribution. The customers are telling Microsoft that, if the company charges these prices, sales volumes will fall for both the PC manufacturers and for Microsoft. Microsoft would be well advised to listen to these customers since Microsoft makes a lot more on the average PC than does the PC manufacturer. Microsoft can not, for long, operate at cross purposes with these PC manufacturing customers. High prices to these customers push them to alternative software suppliers. (See Video #7: Constraints on the Ability of Competition to Expand on StrategyStreet.com.)
Here are two of the problems. First, Microsoft intends to charge $50 for an entry level version of the operating system, called Windows 7 Starter Edition, which is triple the price the company gets for the cheapest version of Windows out now. Microsoft charges between $60 and $150 for Vista today, but the PC manufacturers can use the older Windows XP for roughly $15 for netbooks, the only growing sector of the PC market. If Microsoft raises the price for the cheapest operating system to $50, the PC makers have to raise their prices or lose all the profits they have on the netbooks. Second, Microsoft plans to charge an additional $200 for the Windows 7 Home Premium edition. This additional cost would increase the price of a mid-range PC by 50%, from around $400 to about $600.
The PC customers have seen significant changes in their market. Competition has increased and prices have fallen. The average notebook, the source of most profits in previous years, has seen a price decline of about $800 from $1400 in 2004. The average notebook now costs less than the average desktop.
These PC manufacturer customers have an important message for Microsoft. (See Video #1: The Two Best Consultants in the World on StrategyStreet.com.) They are Microsoft’s key channel of distribution. The customers are telling Microsoft that, if the company charges these prices, sales volumes will fall for both the PC manufacturers and for Microsoft. Microsoft would be well advised to listen to these customers since Microsoft makes a lot more on the average PC than does the PC manufacturer. Microsoft can not, for long, operate at cross purposes with these PC manufacturing customers. High prices to these customers push them to alternative software suppliers. (See Video #7: Constraints on the Ability of Competition to Expand on StrategyStreet.com.)
Monday, April 6, 2009
Pricing Against a High-End Product
In StrategyStreet terminology, a Standard Leader is a company who sells the majority of its products at the most common industry price point. The most common product we call the Standard Leader product. At the high end of the market are those companies who offer products with extra features and services for prices starting about 10% higher than the Standard Leader product. We call those companies, and their products, Performance Leaders. In the personal computer industry, Apple is a Performance Leader; Dell and Hewlett Packard are Standard Leaders.
Apple introduced its Mac-Book Air laptop early in 2008. This was an ultra-thin machine that appealed to customers who wanted light weight and high style in their personal computer.
Somewhat later in the year, Hewlett Packard introduced its high end Voodoo Envy laptop. This is an example of a Standard Leader company introducing a Performance Leader product in competition with a Performance Leader company. (See the Symptom and Implication, “Customers are taking on more suppliers because shortages have appeared” on StrategyStreet.com.) This happens in most industries. Recently, Dell has announced its Adamo high-end personal computer. Dell claims the Adamo is the thinnest and the most stylish in the market. These three Performance Leader computers sell strictly on style. Their technical specs are not much different from other laptops, or from one another.
There is something interesting, though, in the way the computer industry Standard Leaders have priced their products against the Apple computer. The Apple Mac-Book Air sells for about $1800; Hewlett Packard’s Voodoo Envy sells for $1900; and Dell’s Adamo sells for $2000. The Standard Leader products carry prices above the price of the Mac-Book Air, the leading Performance Leader product.
This is an unusual approach to pricing. The Standard Leaders would like to take market share from Apple but they have given up one of their most powerful advantages, their low costs due to Economies of Scale and, potentially, lower prices. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.) A more robust approach is for the Standard Leader to use its superior economies of scale and distribution power to introduce a product somewhat below the price of the Performance Leader product. This enables the Standard Leader to introduce a product that will take share from the Performance Leader, slowing its growth and reducing its margins. Consider these examples of that pricing strategy.
* Toyota introduced the Lexus brand against Mercedes Benz at a price point of $39,000 compared to an average $50,000 Mercedes Benz price.
* MSN priced its broadband product at $39.95 to compete against AOL’s broadband at $44.95.
* The Palm PDAs competed against PDAs using Microsoft’s Pocket PC operating system at prices 20% or more below the pocket PC-driven machines from Compaq and Hewlett Packard. Then, smartphones undercut PDAs.
* Schwab’s 2% cash back credit cards carried no annual fees in competition with fee-bearing airline miles credit cards.
* McDonalds and Dunkin Donuts introduced high-end coffee drinks at prices nearly 50% below those of an equivalent drink at Starbucks.
* Kraft’s DiGiorno high-end frozen pizza came out at a price of $5.59 to compete against home delivery pizza at around $7.00.
My guess is that neither the Hewlett Packard nor the Dell high-end computer will have any impact at all on Apple and its Mac-Book Air.
Apple introduced its Mac-Book Air laptop early in 2008. This was an ultra-thin machine that appealed to customers who wanted light weight and high style in their personal computer.
Somewhat later in the year, Hewlett Packard introduced its high end Voodoo Envy laptop. This is an example of a Standard Leader company introducing a Performance Leader product in competition with a Performance Leader company. (See the Symptom and Implication, “Customers are taking on more suppliers because shortages have appeared” on StrategyStreet.com.) This happens in most industries. Recently, Dell has announced its Adamo high-end personal computer. Dell claims the Adamo is the thinnest and the most stylish in the market. These three Performance Leader computers sell strictly on style. Their technical specs are not much different from other laptops, or from one another.
There is something interesting, though, in the way the computer industry Standard Leaders have priced their products against the Apple computer. The Apple Mac-Book Air sells for about $1800; Hewlett Packard’s Voodoo Envy sells for $1900; and Dell’s Adamo sells for $2000. The Standard Leader products carry prices above the price of the Mac-Book Air, the leading Performance Leader product.
This is an unusual approach to pricing. The Standard Leaders would like to take market share from Apple but they have given up one of their most powerful advantages, their low costs due to Economies of Scale and, potentially, lower prices. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.) A more robust approach is for the Standard Leader to use its superior economies of scale and distribution power to introduce a product somewhat below the price of the Performance Leader product. This enables the Standard Leader to introduce a product that will take share from the Performance Leader, slowing its growth and reducing its margins. Consider these examples of that pricing strategy.
* Toyota introduced the Lexus brand against Mercedes Benz at a price point of $39,000 compared to an average $50,000 Mercedes Benz price.
* MSN priced its broadband product at $39.95 to compete against AOL’s broadband at $44.95.
* The Palm PDAs competed against PDAs using Microsoft’s Pocket PC operating system at prices 20% or more below the pocket PC-driven machines from Compaq and Hewlett Packard. Then, smartphones undercut PDAs.
* Schwab’s 2% cash back credit cards carried no annual fees in competition with fee-bearing airline miles credit cards.
* McDonalds and Dunkin Donuts introduced high-end coffee drinks at prices nearly 50% below those of an equivalent drink at Starbucks.
* Kraft’s DiGiorno high-end frozen pizza came out at a price of $5.59 to compete against home delivery pizza at around $7.00.
My guess is that neither the Hewlett Packard nor the Dell high-end computer will have any impact at all on Apple and its Mac-Book Air.
Monday, March 30, 2009
Cisco's New Server Product
Cisco recently announced that it was entering the server market. Details are sketchy right now, but we might take a brief look at what Cisco needs to do to be successful. We will use the Customer Buying Hierarchy as our analytical tool.
A bit of background. Cisco is entering the market for servers in order to increase the amount of the global IT purchase that it is able to address. Cisco claims that today it addresses about 10% of the total annual purchase of IT products. With the introduction of its server product, it believes that it will address 25% of that market.
But growth is not all that is pushing Cisco in the direction of servers. Hewlett Packard looms. Over the last few years, HP has developed and improved its ProCurve networking gear product line. This product line competes directly with Cisco routers and switches. Cisco may feel compelled to respond to HP’s forays into its market by counter-attacking in the server market. (See the Symptom and Implication, “Some competitors proliferate products around the heart of the market” on StrategyStreet.com.)
The Customer Buying Hierarchy holds that customers buy using four criteria: Function, Reliability, Convenience and Price. They use these criteria in that order for all purchases. Let’s use that Customer Buying Hierarchy to evaluate what we know of Cisco’s offering.
Function: Function refers to the characteristics of the product that affect the way the product is used by the customer. It includes all the features of a product. Cisco is entering the high-end of the server market, where margins are good and there seems to be some product differentiation among the competitors. We don’t know anything about the server itself, but the company’s offering integrates the server, networking components, data storage and virtualization software in one integrated package. It appears that the company is offering the hardware/software equivalent of Microsoft’s Windows/Office products. Everything works seamlessly together. These functions individually are not unique. The unique function is that they are all integrated together already in one package. This may give the customer a greater sense that the components will work well together. And it may enable some customers to avoid the cost of services they have needed previously to integrate these components in their IT locations. Cisco is offering a clear functional improvement.
Reliability: Reliability refers to the consistency with which the company delivers on promises made or implied to the customer by its product. There is good news and bad news here for Cisco. The good news is that the company has a sterling reputation for Reliability. Industry analysts claim that Cisco is rarely the Function leader in the industry, but Cisco treats their customers very well and ensures that the customer never gets in trouble using Cisco. It has a powerful reputation with customers as someone you can count on. So, what is the bad news? Cisco’s reputation for Reliability resides in network gear, not in servers. In servers, IBM and Hewlett Packard also have sterling reputations as companies capable of and willing to deliver superb customer service. IT customers trust all three of these companies. But if push comes to shove, wouldn’t the average IT customer trust IBM or HP more in the server product line? Cisco has a hurdle to overcome here. It must find a way to ensure customers that it will help them avoid all potential products from the new Cisco server. This may not be an easy task.
Convenience: This term refers to the ease with which the customer may acquire the product. Cisco looks to be in very good shape. There are several good companies who have signed on to add technology and sales to the Cisco product. Among the partners are such names as Accenture, EMC, Microsoft, VMWare, Red Hat and BMC Software. Customers will have no trouble finding the product and buying it.
Price: We don’t know what Cisco plans to charge for its new server product. One thing is certain. Its price has to be lower than a customer could purchase a high-end blade server and the services to install it. The new product line’s major benefit is that it integrates a number of components already available on the market. (See the Symptom and Implication, “Competitors are changing features of the product” on StrategyStreet.com.) Cisco can not charge more for the integration than the customer would pay to someone else for a final integrated product. In fact, Cisco will have to demonstrate to the customer that it is clearly cheaper to purchase their product than a blade server and accompanying integration services from HP or IBM. Pricing is a big unknown here.
Since we don’t know pricing, we can not reach a final conclusion. However, Cisco has taken on a big challenge here. This will not be easy. In order for this new initiative to produce the kind of results that Cisco hopes for, it is likely that its competitors, HP and IBM, are going to have to fail their customers in some way to enable HP to gain a major share of the market. Current IBM and HP customers are likely to grant these companies time to copy the unique benefits Cisco offers. In most mature markets, competitor failure is as important as a product benefit win in moving market share. (See the Symptom and Implication, “Share is tougher to shift” on StrategyStreet.com.) HP and IBM could fail if they do not create an equivalent benefit and then match Cisco’s prices. This is a tough challenge, but Cisco has met tough challenges before.
A bit of background. Cisco is entering the market for servers in order to increase the amount of the global IT purchase that it is able to address. Cisco claims that today it addresses about 10% of the total annual purchase of IT products. With the introduction of its server product, it believes that it will address 25% of that market.
But growth is not all that is pushing Cisco in the direction of servers. Hewlett Packard looms. Over the last few years, HP has developed and improved its ProCurve networking gear product line. This product line competes directly with Cisco routers and switches. Cisco may feel compelled to respond to HP’s forays into its market by counter-attacking in the server market. (See the Symptom and Implication, “Some competitors proliferate products around the heart of the market” on StrategyStreet.com.)
The Customer Buying Hierarchy holds that customers buy using four criteria: Function, Reliability, Convenience and Price. They use these criteria in that order for all purchases. Let’s use that Customer Buying Hierarchy to evaluate what we know of Cisco’s offering.
Function: Function refers to the characteristics of the product that affect the way the product is used by the customer. It includes all the features of a product. Cisco is entering the high-end of the server market, where margins are good and there seems to be some product differentiation among the competitors. We don’t know anything about the server itself, but the company’s offering integrates the server, networking components, data storage and virtualization software in one integrated package. It appears that the company is offering the hardware/software equivalent of Microsoft’s Windows/Office products. Everything works seamlessly together. These functions individually are not unique. The unique function is that they are all integrated together already in one package. This may give the customer a greater sense that the components will work well together. And it may enable some customers to avoid the cost of services they have needed previously to integrate these components in their IT locations. Cisco is offering a clear functional improvement.
Reliability: Reliability refers to the consistency with which the company delivers on promises made or implied to the customer by its product. There is good news and bad news here for Cisco. The good news is that the company has a sterling reputation for Reliability. Industry analysts claim that Cisco is rarely the Function leader in the industry, but Cisco treats their customers very well and ensures that the customer never gets in trouble using Cisco. It has a powerful reputation with customers as someone you can count on. So, what is the bad news? Cisco’s reputation for Reliability resides in network gear, not in servers. In servers, IBM and Hewlett Packard also have sterling reputations as companies capable of and willing to deliver superb customer service. IT customers trust all three of these companies. But if push comes to shove, wouldn’t the average IT customer trust IBM or HP more in the server product line? Cisco has a hurdle to overcome here. It must find a way to ensure customers that it will help them avoid all potential products from the new Cisco server. This may not be an easy task.
Convenience: This term refers to the ease with which the customer may acquire the product. Cisco looks to be in very good shape. There are several good companies who have signed on to add technology and sales to the Cisco product. Among the partners are such names as Accenture, EMC, Microsoft, VMWare, Red Hat and BMC Software. Customers will have no trouble finding the product and buying it.
Price: We don’t know what Cisco plans to charge for its new server product. One thing is certain. Its price has to be lower than a customer could purchase a high-end blade server and the services to install it. The new product line’s major benefit is that it integrates a number of components already available on the market. (See the Symptom and Implication, “Competitors are changing features of the product” on StrategyStreet.com.) Cisco can not charge more for the integration than the customer would pay to someone else for a final integrated product. In fact, Cisco will have to demonstrate to the customer that it is clearly cheaper to purchase their product than a blade server and accompanying integration services from HP or IBM. Pricing is a big unknown here.
Since we don’t know pricing, we can not reach a final conclusion. However, Cisco has taken on a big challenge here. This will not be easy. In order for this new initiative to produce the kind of results that Cisco hopes for, it is likely that its competitors, HP and IBM, are going to have to fail their customers in some way to enable HP to gain a major share of the market. Current IBM and HP customers are likely to grant these companies time to copy the unique benefits Cisco offers. In most mature markets, competitor failure is as important as a product benefit win in moving market share. (See the Symptom and Implication, “Share is tougher to shift” on StrategyStreet.com.) HP and IBM could fail if they do not create an equivalent benefit and then match Cisco’s prices. This is a tough challenge, but Cisco has met tough challenges before.
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