Industry Perspective of E-Commerce IEEE MNGN 2006 Arindam Mukherjee AMS Solutioning Team Global Business Services IBM India The World Wide Web • The most participatory marketplace ....that this.
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Industry Perspective of E-Commerce IEEE MNGN 2006 Arindam Mukherjee AMS Solutioning Team Global Business Services IBM India The World Wide Web • The most participatory marketplace ....that this country, and indeed the world, has ever seen.” United States Court of Appeals for the Third Circuit, Philadelphia, in granting an injunction against the Communications decency Act. June 12, 1996 The World Wide Web • Is the web a medium for advertising? • It is also a medium for: – Direct Marketing – Retailing and Distribution – Delivery of service and product elements – Marketing Research – Testing price • A Comprehensive Marketing Environment STRUCTURE OF INDUSTRY SUPPORTING INTERNET COMMERCE BANNER ADVERTISING AGENCIES ADVERTISING PLACEMENT Doubleclick iTraffic Modern Media Digital Planet AD TRACKING I/PRO Net Count AD-SUPPORTED CONTENT ESPN USA Today CNET My Yahoo! PROMOTION E-coupons Hot Coupons SERVICES Hotmail Juno NETWORK ARCHITECTURE Cisco 3Com Bay Networks INTERNET SERVICE PROVIDERS AT&T Worldnet @HOME AOL PLATFORMS World Wide Web AOL/Compuserve Prodigy AD-SUPPORTED PORTALS AND NAVIGATION SITES Search Engines Infoseek Google Lycos SUBSCRIBER SUPPORTED CONTENT Directories WhoWhere Big Yellow Wall Street Journal Web Review BROWSERS Netscape Navigator Microsoft Explorer Portal sites AOL Yahoo MSN TRANSACTIONS PAYMENT SYSTEMS CyberCash DigiCash Visa Verisign COMMERCE TOOLS Open Market Broad Vision Connect Firefly Amazon.com Autobytel E-Bay Peapod CDNow 1-8-Flowers What is Electronic Commerce? • From a communications perspective: delivery of goods, services, payment and information over computer networks • From a business process perspective: application of technology towards automation of business processes and workflow • From a services perspective: cut service costs while improving the quality of goods and increasing the speed of service delivery What is Electronic Commerce? [continued] • From an online perspective: the capability of buying and selling of products and information on the Internet • From a collaborations perspective: as the framework for inter and intraorganisational collaboration • From a community perspective: provides a gathering place for community members to learn, transact and collaborate How is E-business different from Electronic Commerce? • Electronic Commerce is widely understood by many as transactions conducted between business partners – Transaction where buyers actually buy and shoppers actually shop – Transaction such as a support enquiry or an online catalogue search – Includes etailing, online banking and shopping How is E-business different from Electronic Commerce? • E-business – not just buying and selling of goods and services – Also servicing customers – Collaborating with business parters – Conducting electronic transactions within an organisation – Thus, a much broader definition – Automation of all business processes in the value chain • From procurement or purchasing of raw materials, to production, to stock holding, distribution and logistics, to sales and marketing, after sales invoicing, debt collection and more – Includes e-commerce and e-marketing Case: Amazon Case Facts : Background • Expanded from books to offering 28 million items across numerous categories • Acquired 29 million global customers • In 1999, Amazon’s founder and CEO Jeff Bezos named Time magazine’s Man of the year • By 2000, Amazon.com became the 48th most valuable brand in the world (Interbrand) Global Growth : Price • Late 2000, Amazon’s US books/music/movies segment lost $2.3 billion • Amazon borrowed $2.1 billion for the sake of its international investments • A few analysts were questioning Amazon’s ability to survive until it reached profitability • Dotcom burst – Internet stock shakeout stripped billions of dollars from the valuations of Internet-related stocks The Beginning An online bookseller has virtually unlimited online shelf space and can offer customers a vast selection through an efficient search and retrieval interface. This is particularly valuable in the book market because the extraordinary no. of different items precludes even the largest physical bookstore from economically stocking more than a small minority of available titles. In addition, by serving a large and global market through centralised distribution and operations, online booksellers can realise significant cost advantages relative to traditional booksellers. Amazon IPO Key advantages of Online Business model to the traditional book retailing industry Physical store-based book retailers must make significant investments in inventory, real estate and personnel for each retail location. This capital and real estate intensive business model limits the amount of inventory that can be carried in any location. The average superstore stocks less than 10 % of the estimated 1.5 million English language books believed to be in print, which limits customer selection. Finally, publishers and retailers cannot easily obtain demographic and behavioural data about customers. Get Big Fast • Audacious start – 1 million titles! • 1999, entirely new businesses (electronics, toys and software in US and music in Europe) – Co-branded auctions and zShops – Revenue models fundamentally different from its initial model – Its storefront model, though more efficient than brick and mortar competitors, had a significant capital component • Investments in inventory and fulfillment – New businesses – acted as an agent facilitating transactions and taking a fee • zShops were virtual shopping malls • Amazon Payments monitored zShop transactions Joy of a Negative Operating Cycle • Received credit card payment from customres within a few days of purchase • Did not pay its vendors for 30 – 60 days of sale • Did not actually carry inventory in many of its products – relied on suppliers for fast fulfillment – shifted inventory risks to vendors • Typical operating cycle (order to cash) was around (-) 41 days – Typical book retailing operating cycle was around (+) 78 days • Generated interest on the full sale price (cost of goods sold and gross margin) for over a month Amazon’s Business Model • Comparative lack of physical infrastructure – a minimum of bricks – carries minimal inventory – relies on rapid fulfillment from major distributors and wholesalers • distributors and wholesalers carry a broad selection of titles • Ingram, the single largest supplier, accounted for 59% of the company’s inventory purchases (1996) – Used automated interfaces for sorting and organising orders – Electronically ordered books often shipped by distributors within hours of receipt of order from Amazon.com Amazon’s Business Model • A mix of Web skills – e-commerce platform and payment mechanisms • Fulfillment expertise • Amazon’s distribution facility a key competitive advantage (Bezos) • Yet, Amazon enjoyed a much higher valuation than even the best of breed retailers with stateof-the-art distribution skills • What then separates Amazon from other retailers? Getting Personal We use collaborative filtering, a statistical method that looks at your purchase history, compares it to other customers, builds a statistical aggregage “soul mate” that tells you what your soul mates has purchased that you have not. Bezos Amazon.com Annual Income Statement Millions of US Dollars FY FY FY FY 2005 2004 2003 2000 FY 1999 FY 1998 FY 1997 FY 1996 Total Sales 8490 6921 5264 2762 1639 609 147 15 Net Income 359 588 124 31 6 35 -1411 720 Case: Dell Online Case: Dell Online • Highlights the emerging components of Internet success: – a customer friendly value-added sales interface (website) – a cost-effective product procurement (or production) and distribution system Case: Dell Online Two major drivers for Dell’s online success • Michael Dell’s support for the channel – Envisioned the channel – Created the organisational focus for the effort – Stepped in and provided direction when in problems • Internal and external public relations blitz by the online team – Goals for the public relations campaign • Create internal awareness • Legitimise and build momentum for the Ecommerce initiative with customers and thought leaders Case: Dell Online • Dell is successful on the online channel because the Internet was a direct extension of the highly successful Dell Direct model • similar to the ATM in the banking industry • the substitution of Internet for telephone • The Internet allowed Dell to expand its reach without tampering with its product delivery system • The reach of direct to consumer sales has been limited to 20% of the pc market, although the Dell direct model continues to be successful How would you judge Dell's online success? Transaction channel •Mid 90s: Dell retreated from this channel – Individuals and small business customers were less sophisticated; they required more intensive sales and service support • Late 90s: This segment began to change – Unsophisticated first-time computer buyers of the late 80s sought replacement computers – Web was an opportunity to educate this unsophisticated users • Dell capitalised on this opportunity – Gaining about 50% of its transaction business conducted via the Internet channel How would you judge Dell's online success? Relationship channel • The Internet was an opportunity to create differentiation in the market – ultimately increase switching costs between Dell and its competitors • The Premier pages can become the basis of competitive advantage for Dell • With Dell’s emphasis on this market, this was a breakaway opportunity What advantages does Dell derive from its online success? Transaction segment • The Internet has created for Dell a point of access to the consumer market • There is potential to expand the market going through the direct channel • Majority of Sales conducted through Dell online were from BSD and DCS segments • Transaction customers attracted to the website were the more sophisticated users Dell deisres (Market Research findings) How substantial and sustainable are these advantages in comparison to its competitors? • Dell will continue to have a sustainable competitive advantage in the Internet space even after its first mover advantage is eroded – Dell has created considerable awareness of the company and its Internet-based commerce capabilities – Has a `high-velocity’ direct to consumer supply chain model behind its webpage • a model highly tuned to deliver efficiencies surpassing industry norms – Only Dell can deliver in the fulfilment side with its proven direct supply-chain from the manufacturer through to the consumer Case: Dell Online The Dell way To remain entrepreneurial To launch a concept, and refine the process based on market response Priceline.com Case Introduction • Fundamental change made possible by Internet, change in the basic mechanism of “making the market” – Most products are sold via a process in which the manufacturer/service provider offers a good at a stated price – Consumers accept or reject the offer of the unit of supply at the given price Introduction • Priceline “flipped a conventional system on its head” – A potential buyer advertises a unit of demand at a given price to potential suppliers – Suppliers then choose whether or not to meet this demand • How significant is this move towards buyer driven commerce? Economic Logic for “buyer driven commerce” • Lead to greater social welfare and greater supplier profits – “Posted price” on items have the benefit that a transaction can take place without any additional information exchange between buyer and seller – Downside: All buyers pay the same price despite perhaps vast differences in their reservation values – To tap the high reservation values of some, by setting a high price, the seller keeps others from buying despite their reservation value well above the firm’s cost Much more than a new pricing mechanism • Moving away from uniform pricing to customised pricing • Buyers pay different prices depending on their perceived value of the product • Allows a potential buyer to express his willingnessto-pay – What the buyer is willing to reveal is not actually his valuation of the product • Then no consumer surplus – Since customer cannot increase his named price, some correlation with “named price” and true willingnessto-pay Priceline Airlines ticket model • Priceline’s brilliance is in creating not only a new model of “name your pricing” only • Rather, there is a product story here as well • Priceline creates a new product in the airlines space: – An unbranded seat with a routing selected to the convenience of the airline, not to the convenience of the traveler Priceline Airlines ticket model • There is a price-sensitive segment in the Airlines industry – “I want low price” – The Airlines are perfectly capable of finding this type of customer on their own • There is another untapped segment – “I want low price and I am willing to fly a convoluted routing, on any Airlines, at any time of the day to get it”. • Priceline finds them and permits them to communicate their willingness to pay Customer Segment in Airlines Private Jet First Class Senior Executive Middle Management Regular Leisure Travel Bus People Priceline model – Airlines industry Consumer benefits • Economic – – – – Access to unpublished fares / cheap No advance purchase requirements No Saturday night stay necessary to get a cheap seat Easy to do • Non-economic – “I was in control” – “Named my own price/Got what I wanted” – “Beat the Airlines pricing scheme” Priceline model – Airlines industry Key Supplier benefits • No cannibalisation/Incremental demand • Sell off low marginal cost inventory, which would "perish" otherwise • Block low-end "no-name" carriers • Preserve existing price structure Why Airlines Industry was a very good initial setting for Priceline to target? • Generic demand was price sensitive; so low prices expanded demand rather than cannibalised high price seats • Low industry load factors – 50,000 seats flew empty each day – With a near zero marginal cost, airlines were looking for incremental demand even at low prices as long as it did not upset the rest of their price structure • Consumers have relatively low brand preference • Traditional airline pricing generally looked upon as unfair – The idea of “name your own price” and empowerment over the airlines was very appealing – a feeling that “I won” • Huge potential market Competing Long term • Patents on buyer driven commerce – Microsoft is posing steep challenge – How well will this hold up? – If patent protection is ineffective, idea can be easily copied • Brand building – A brand which empowers customers and puts them in control – Priceline’s ability to attract customers by presenting itself as a brand would be critical Lessons • Priceline is in effect an intermediary between suppliers and potential customers • The Internet introduced a new player in the system – in contrast to the more usual disintermediation story where the Internet eliminates middleman • The real success of Priceline is not in a new pricing mechanism, but rather a way in which an unattractive market segment becomes attractive – By now having a mechanism to express its willingness to accept a lower quality product in return for the low price All figures in million USD Year 1998 Revenues 35 482 719 Cost of Revenues Gross Profit (Loss) Expenses 36 424 571 (1) 57 148 111 1,120 122 (112) (1,062) 25 Operating Profit (Loss) Year 1999 Year 2004 Top Ten Internet Brands Rank 1998 2005 Source: A C Nielsen 1 2 3 AOL Yahoo! Netscape Yahoo! Microsoft MSN 4 5 6 7 Amazon Priceline Infoseek Excite Google AOL eBay MapQuest 8 9 10 Amazon Real Weather Channel Case CNET 2000 CNET “Our mission is to be the most important company to the most important industry in the world – the IT industry…. If you become the leading information intermediary, you have great power.” Shelby Bonnie CNET – High points as on June 99 • Relies on advertising and “lead generated” revenue – derived when CNET referred prospective customers to its e-commerce partners • Positioned itself as a leading market maker for technology-savvy individuals scouting for technology products • Posted revenue gains and quarterly profits in each of five succeeding quarters • Tenfold increase in share price between April 1998 and April 1999 • CNET announced an aggressive marketing campaign of $100 million • Immediately following the announcement, stock price got a hit! CNET 2000 – the process • An ambitious undertaking for a young Internet company – Many of CNET’s peers lacked the discipline to reflect systematically on their competitive position and strategy • A year long planning process, completed in 1999 • A team spent six months in highly interactive small group sessions, involving each employee • Did SWOT analysis • Did extensive consumer research • Presented their findings in a series of workshops to every employee CNET 2000 objectives • Determined which product markets and customer segments to serve – Concluded that they had defined the technology market too narrowly – Faced an enormous untapped opportunity in their core business – Decided to avoid diversifying beyond technology into other vertical markets – Resolved to extend their coverage beyond PC computing into new segments such as enterprise computing, consumer electronics and telecommunications equipment – Decided to extend CNET’s reach beyond computer hobbyists and corporate IT professionals to encompass managers who were “technology novices” CNET 2000 objectives • Re-articulated their business model from that of content provider to an information intermediary • Sized up the competitive landscape • Embarked on an aggressive $100 million marketing campaign – Research indicated that CNET’s brand awareness was low within the customer segments the company planned to target CNET Business Model Business Model • A business model is the method of doing business by which a company can sustain itself -- that is, generate revenue Content provider • Produces original information, or repurposes for Internet distribution content originally created for another medium CNET Business Model Portal • Aggregates Internet traffic by providing users with: – Navigational assistance and links to relevant websites – Information content • Exploits that traffic through advertising and e-commerce partnerships CNET Business Model • CNET illustrates that the line between content provider and the portal business model is somewhat blurry – Most online content providers, over and above delivering self-produced information, also link to third-party information sources – To differentiate themselves, many portals provide some proprietary content – Whether a site should be categorised as a content provider or portal depends on how much of its content is self-produced CNET Business Model • CNET positions itself between manufacturers, retailers and end users as an information intermediary • It delivers information that is: • Complete – Unlike content providers, who are less inclined to link to relevant third party content sources • Credible – Unlike list brokers, who cannot be trusted to represent their clients strengths and weaknesses • Convenient to use – Unlike portals, who present a great deal of information, but fail to integrate the information in an easy-to-use, consistent manner CNET Competition • Prior to CNET 2000, most CNET employees considered Ziff Davis, IDG and CMP as their main competition • These are technology focused publishing companies that have extended their print franchises online • Redefined competition: – Anyone sitting between buyers and sellers of technology products • Suddenly, CNET found Microsoft, Amazon and Yahoo! as serious contenders CNET Competition • Viewed the market as three tiered • On top sits the “Aggregators” – Companies like Yahoo!, AOL and Excite – Search engine who help find information • Next tier is “Provider” – Companies like Ziff, IDG, CMP and CNET • Bottom tier has “Closers” or “Executors” – Egghead or Amazon – Companies that actually sell things CNET Competition • From the top tier Yahoo! can aggregate all content providers – Users get multiple viewpoints – Finds lots of information that’s relevant – They can even link up with a potential seller – They can offer advertisers good targeting – Cut CNET out of the loop – Problem: • Their service not as well integrated as CNET – Aggregate content from so many disparate third party sources CNET Competition • Amazon can do well to integrate information – Put product reviews just where you want to see them – Create tools to compare products – “Provide eyeballs when they are most valuable – right before consumers make a decision” – Downside: just one vendor – Can you be completely sure you have got the best product or the best price? • “We have to out-aggregate Yahoo! and outintegrate Amazon to dominate this vertical” CNET Product Strategy • Goal: “Serve all technology related need of our users” • Being complete and being helpful • Completeness being as wide and as deep as possible in technology information • Being helpful: – Helping people stay up-to-date – Helping them get something done • Explore, evaluate, and execute • Even linked to their competition • A different style of presentation CNET Organisational changes • Integration of company’s websites: – Download.com – Shopper.com – News.com – Gamecenter.com [now gamespot.com] – Builder.com • Integrated the look and feel • Common infrastructure CNET’s decision to avoid entering other vertical markets • Technology market is very large and growing rapidly – The broad IT market roughly $ 1 trillion – Current focus was on personal computing and Internet • “Barely scratching the surface” – Significant opportunity to provide information about other products and services • Enterprise resource planning software • Telecommunications products and services What happened? • In January 2000, CNET purchased mySimon for $700 million – mySimon is a shopping “bot”, a software robot – It allows consumers to compare a large set of online retailers’ for a broad range of products – Provides links to the retailers for consumers to complete the purchase – mySimon is paid lead generation fees by retailers What happened? • In March 2000, Halsey Minor stepped down as CNET’s CEO. He retained his position as Chairman of the Board • Shelby Bonnie replaced Minor as CEO • CNET changed its name to CNET Networks, signaling a desire to extent the CNET brand beyond information technology. What happened? • Despite management’s repeated statements, they have changed course. • Minor compared mySimon acquisition to Turner Broadcasting’s expansion from original TBS Network into a whole suite of properties including CNN, TNT and Cartoon network – “We are doing what media companies do as they mature; they get larger and they develop more properties” • In July 2000, CNET acquired ZDNET in a stock deal worth $1.6 billion. • Wall Street reaction to the merger was positive What happened? • “We have proven that we can build a profitable business out of linking buyers and sellers of technology products. In the future, the company that will be most important to e-commerce will be the one that enables the truly informed purchase decision in every category” Halsey Minor, at the time of acquisition of mySimon on January, 2000 Financial performance 2000 (in million dollars) 2001 (in million dollars) Projected Total Revenue 160 217 Actual Total Revenue 427 285 Projected Net Profit (5) 29 Actual Net Loss (938) (1989) Financial performance All figures in USD million Revenues 2001 2002 2003 285 236 246 2004 (Nine months) 202 (381) (20) (4) Operating (1,857) Income (Loss) Net Income 2 Case Autobytel.com Problem • Struggling to accelerate revenue growth • Alternatives: – add new dealers • 89% of current company’s revenues are from dealer subscription fees – focus on new products and services • service and maintenance • wholesale car market • How to reposition itself, given growing competition Traditional Consumer Manufacturer Reseller Distributor Internet DELL Consumer Disintermediation: The Dell Example Traditional Consumer Dealer Manufacturer Dealer Manufacturer Internet Consumer AUTOBYTEL Re - intermediation: The Autobytel Example Disintermediation Theory • The disintermediation theory argues that most intermediaries will become eliminated, as the marketplace becomes more e-commerce focused (Benjamin and Wigand 1995). • Only direct links to the end consumer Internet Changes Traditional Channel structure • Typically, internet facilitates disintermediation – producer uses control over information to displace traditional channel members – Dell • In Autobytel, company uses control over information to take market power away from traditional channels – instead of reducing the number of steps, Autobytel has added a step in the channel The Car Buying and Ownership Cycle (Step 1) Research/ Select Car (Step 2) Find Dealer/ Settle Price (Step 6) Resell the car AUTOBYTEL (Step 3) Get financing and insurance (Step 5) Service/ Maintenance (Step 4) Close the deal/ Take Delivery Value Proposition for consumers • A better price • A no-haggle experience • Convenience and Time-savings • Unbiased information Disadvantages: • Doesn’t cut out the dealer – consumers after submitting purchase request have to hear from a salesperson • Actual dealer quote can be known only after salesperson’s calls • Consumers have to visit dealership to “sit behind the wheel, feel the leather and take a test drive Value Proposition for dealers • Lead generation – Mid ’99, sends about 200,000 referrals to dealers – 2993 dealers, so average dealers get 66 leads – Exclusive territories to dealers • Higher yields (Targeted marketing) – Referrals are of higher quality – Typical car salesman sales 9 cars/month – Autobytel Salesman sales 15 – 30 cars/month Autobytel’s efforts for Dealers • Grant geographic exclusivity – assures dealers a large volume of referrals – higher closing ratios (no competition over a lead) • Training to handle Autobytel customers • 25 DMs for field support to Autobytel salespeople • Believes that relationship with dealers has been the key to success What it is right now Autobytel Inc. is a leading Internet automotive marketing services company that helps retailers sell cars and manufacturers build brands through marketing, advertising, data and CRM. The Company owns and operates the automotive websites Autobytel.com, Autoweb.com, Carsmart.com, Car.com and AutoSite.com. As the Internet's largest new car buying service, Autobytel generates over a billion dollars a month in car sales for dealers through its services and was the most visited new car buying and research destination in 2003, reaching millions of car shoppers as they made their vehicle buying decisions. Income Statement Total Revenue Operating Profit Net Income 2001 2002 2003 71.1 80.9 88.9 (11.8) 2.6 8.7 (44.9) (20.7) 7.4 Case: Oracle Corporation The IT World Hardware Vendors HP, IBM, Sun Microsystems and Cisco Software Vendors Microsoft, Oracle Independent Service Vendors SAP, People Soft, Siebel System Integrators Accenture, IBM, Deloitte Database Software Market Share Company 2005 Market Share 2005 (%) 2004 Market Share 2004 (%) 2004-2005 Growth (%) Oracle 6,721.10 48.6 6,234.10 48.9 7.8 IBM 3,040.70 22 2,860.40 22.4 6.3 Microsoft 2,073.20 15 1,777.90 13.9 16.6 Teradata 440.7 3.2 412.1 3.2 6.9 407 2.9 382.8 3 6.3 1,134.70 8.2 1,090.40 8.5 4.1 13,817.40 100 12,757.80 100 8.3 Sybase Other Vendor s Total Case Facts : Background Client 3-Tier Architecture User Business Logic ERP/CRM Database Original Oracle Case Facts : Background • Three Tier Software Architecture • Produced database products at the lowest level of the tier • Middle tier was widely profitable for firms like SAP and Siebel • Developed applications for middle tier – software applications – development tools for customising their own applications Oracle e-Business Suite • A single view into the company • A single source of data – at Oracle, before it adopted its own suite, if it wanted data on its employees worldwide, it accessed 70 databases – for data on its largest customer, it had to access each geographic region’s database where the customer did business with Oracle – with a single, centralized software, Oracle accessed all company information through an internet browser • Not the only product of this sort in the market, but the only integrated suite available – otherwise a client had to use several vendors’ software that the vendors helped integrate Intention • Expand from its market-share-leading database software • Entice firms to buy the entire suite of business applications – as opposed to the “best of breed” solutions Oracle e-Business Suite CEO Can Answer all kinds of questions about internal operations ERP CRM Operations Data Financial Data HR Data Customer Data Can Answer all kinds of questions about customers What changed at Oracle? Operational Structure • From regionally organised to centralised • Centralising operations – implication of standardizing processes – pull internal operations out from the control of country managers, and locate them at HQ • 97 email servers with 120 databases to 2 servers and 4 databases – one system guided all internal business practices • business processes could be standardized throughout – Downside • inability to adapt systems to local environments • no local experimentation, innovation to occur centrally within organisation What changed at Oracle? Internal Operations • Removed paper processing • Better performance for employees – Faster Access – Less work • All done on Oracle products • Advertisement for potential benefits for use of the product • Learned how to use its own products • Improve its consulting services • Created an internal feedback loop that improved features and functionality of product What changed at Oracle? Sales Processes • Selling to lower-level tech people to “C” level executives • Focus shift • From Features and functionality to to streamlining practices to eliminate waste • Advantages touted: – CEOs could view their world from their desktop • Oracle’s early success got people’s attention • Rather than Sales Reps, C-level executives wanted to talk to Ellison and his inner circle Can other companies expect similar results? • Oracle experienced cost savings as well as growth in revenues • Other firms can experience cost savings • Only in rare instances will they get revenue enhancements • A great deal of Oracle’s savings derived from low-hanging fruits existing • Before using its own software, Oracle was very inefficient – many manual and redundant processes – provided tremendous cost savings Can other companies expect similar results? • If other firms demonstrate usefulness of Oracle’s products, Oracle’s revenue stream will be increased! • Cost savings likely advantage for Oracle’s customers • Oracle publicly demonstrated the usefulness of its products • Flip side is, Oracle set itself up for public display of success or failure Which solution to take? • While deciding a software solution, a firm’s decision comes down to deciding – a complete and integrated suite of products • Oracle’s e-Business Suite – a collection of “best in breed” applications • Siebel in CRM, Peoplesoft in HR, i2 for SCM – completely customised software • Does other companies have same experience as Oracle while using its products? – Oracle software custom code for Oracle – Off-the-self for its customers – Effect of Oracle product for customer may be very different Argument for e-Business Suite • Even if a single application is not “best in breed”, savings in integration time and hassle • Ellison stated he was replicating Microsoft Office strategy – integrated suite of products allowed individual applications to lag behind competition • Dell and Compaq, implemented ERP system – Dell canceled an ERP order and built a customised solution – Dell based its bet on internal capabilities to give competitive differentiation Co-opetition - Dancing with the enemy • Oracle wages war with Microsoft in database software, but Oracle has to run on Windows NT to be commercially viable • One of Oracle's key competitors is SAP, but it is an equally valuable customer • IBM demonstrates benchmark software scores to the industry at an IBM sponsored tradeshow running with Oracle's database software, not IBM's own DB2 • IBM's OS/2 operating system was quashed by Windows, and Lotus 1-2-3 by Excel. Yet IBM remains one of Microsoft's largest licensees • About 70-80% of SAP, JD Edwards, People Soft and i2 software runs on Oracle's database Update • Oracle President Roy Lane left in July 2000 – Sources attributed to pressure from Ellison • Executive Vice President Gary Bloom left in November 2000 – Sources attributed to his desire to become CEO of a company • Stock market reacted negatively to the departure of both executives Top 5 Worldwide CRM Software New License Revenue Market Share Company 2002 Market Share (%) 2001 Market Share (%) Siebel 24.9 28.5 SAP 15.9 10.9 PeopleSoft 4.3 3.9 Oracle 4.3 3.8 Amdocs (Clarify) 3.2 5.5 Estimates for 2002 Source: Gartner Dataquest (June 2003) 14,000,000 40% 12,000,000 35% 8,000,000 30% 25% 20% 6,000,000 4,000,000 15% 10% 2,000,000 5% 0 0% FY 1 FY 995 19 FY 96 19 FY 97 1 FY 998 1 FY 999 2 FY 000 20 FY 01 20 FY 02 2 FY 003 2 FY 004 20 05 Revenues 10,000,000 Operating Margin Oracle Sales and Operating Margin Total Revenues Operating Margin Case: Apple Computer 2005 Summary • Macintosh business – continues to suffer from earlier challenges – despite its – ease of use – buyer loyalty (especially in desktop publishing and education) – powerful brand – Still a nice product • iPod – a fundamental shift in Apple’s positioning and strategy – earlier, Apple business was focused on Macintosh – now, iTunes and iPod available to the Windows world – Opportunity to break out of its former niche position – Dominate one of the fastest growing consumer electronics categories “The Fall of an American Icon” • The year was 1984. Apple Computer Inc. was the magic kingdom. It was the hip, young heart of Silicon Valley – the place where America was showing the world how the combination of technology and entrepreneurship could make a revolution. Apple created the legend of two kids in a garage inventing a computer – and then building a New Age company where the old corporate rules were scrapped … today, that Apple – the very icon of a post-industrial, high-tech America – is barely recognizable in the troubled $11 billion company that bears the name. Years of overlooked opportunities, flip-flop strategies, and a mind-boggling disregard for market realities have caught up with Apple Business Week, 1996 • 1997, Steve Jobs named one of the “25 top executives of the year”. Business Week, 1999 Anecdote, Fortune 1997 • “Apple is a boat. There’s a hole in the boat, and it’s taking on water. But there’s also a treasure on board. And the problem is, everyone on board is rowing in different directions, so the boat is just standing still. My job is to get everyone rowing in the same direction so we can save the treasure”. Gini Amelio, CEO Apple • After he turned away, the person next to him asked, “But what about the hole?” Lessons from Apple Computer 2002 • Big difference between a company having a product advantage and having a competitive advantage • Product advantages alone are difficult to sustain • To build competitive advantage, have to think more broadly about the entire value system of a company – underlying cost drivers (the economics of OS development) – not just making a “better” product” Current Macintosh business • Apple is selling 4 million units per year • Roughly 200 million PCs are being shipped (based on the number of Intel CPUs) • Market share remains mired around 2% • In the last two years, Mac sales have declined to roughly 50% of the overall business • Even in its heyday, Apple never had more than 10% of the market The iPod business • Apple had a market share of 87% in September 2005 in the MP3 business (PC Magazine) • Is this sustainable? • Why have other MP3 players failed? – Apple turned iPod into a fashion item as well as a product – Competitive products have lower prices and comparable features • Access to similar libraries of songs through RealNetworks, Yahoo Sustainable? • Apple’s barriers to imitations – Constant innovations • iPod • video iPod • mini iPod • iPod nano – Innovation may slow down at some point – Apple has successfully filled major price points and innovated at a torrid pace • Switching costs – Locks current users into future iPods with iTunes • Very difficult to buy a song on iTunes and use on a competitive player Sustainable? • Contracts – Long term contracts with leading suppliers of flash memory – Reported to give Apple a 40% discount off list price • Hold up – Music labels are not happy with Apple – Apple sells the iPod at very high margins – Gives away the music – Music companies pressuring Apple to raise prices – Give them a bigger share of the pie Sustainable? • Substitution – biggest long term threat • Renting Music Vs Purchase • Yahoo trying to get consumers rent songs for an annual fee – instead of buying music – if Yahoo succeeded, any generic MP3 player could become popular • Will iPod remain an independent category, or will PDAs or phones integrate the functionality into their products? – especially when flash memory becomes the primary storage tool • Should Apple enter the phone business against Nokia, Motorola or Samsung? – Phone companies were not allowing importing music from iTunes In Millions of U.S. Dollars (except for per share items) ANNUAL INCOME STATEMENT 12 Months 12 Months 12 Months Ending Ending Ending 9/24/2005 9/25/2004 9/27/2003 12 Months Ending 9/28/2002 12 Months Ending 9/29/2001 13,931.0 8,279.0 6,207.0 5,742.0 5,363.0 Cost of Revenue, Total Gross Profit 9,888.0 4,043.0 6,020.0 2,259.0 4,499.0 1,708.0 4,139.0 1,603.0 4,128.0 1,235.0 Selling/General/Admin. Expenses, Total Research & Development Depreciation/Amortization 1,859.0 534.0 – 1,421.0 489.0 – 1,212.0 471.0 – 1,109.0 446.0 – 1,138.0 430.0 – – 0.0 – 23.0 – 26.0 – 31.0 – 11.0 12,281.0 7,953.0 6,208.0 5,725.0 5,707.0 Operating Income 1,650.0 326.0 (1.0) 17.0 (344.0) Net Income 1,335.0 276.0 69.0 65.0 (25.0) Total Revenue Interest Expense(Income) - Net Operating Unusual Expense (Income) Total Operating Expense Summary • All firms ultimately need to reinvent themselves • Apple struggled with innovation for 15 years • Finally hit the jackpot with iPod • Threats exist • But Apple is a great example of rebuilding competitive advantage Case: Google Incorporated Search and Ads • Searchers prefer platforms that deliver more ads?? • “I never click on those ads” • 40% of web searches have commercial motivation • 70% of e-commerce transactions begin with a search • Somebody must be clicking on paid listings – they yielded Google $ 6 billion in revenue in 2005! Search Algorithm • Google’s algorithm for ranking web search results, a closely guarded secret • Incorporates many factors beyond Pagerank • Industry observers speculate that observed click-through rates for pages listed in Google’s search results influence subsequent listings The Portal Opportunity • Google offers many of the features expected from portals – communication tools – personalised home page – video aggregation service – personal information management tools (Calendar, Maps, Blogger, Picasa) – e-commerce services (Froogle, Base) • Is Google missing anything? The Portal Opportunity • Yahoo, MSN and AOL all offer access to a huge array of third party content – nested into channels (autos, finance, job, health, travel etc) • Amassing high quality content, they build consumer traffic – helps them attract additional content partners • Google’s experiments fall short of mass market portal offerings – Google Finance Vs Yahoo Finance Does it make sense to add channels and compete head to head with portals? • A “me too” portal strategy • Negative arguments prevail • Too risky to challenge Yahoo • Schmidt dismisses the portal opportunity – “a tired model …. invented ten years ago” The Software Opportunity – Middleware Layer • A new layer in the PC industry’s existing stack of horizontal layers (CPU, computer, OS, application) • Platform can be accessed by consumers through three existing Google products – Personalised homepage, requires a web browser – Desktop, a standalone, downloadable Windows PC application – Mobile, for cell phone and PDAs Middleware Layer • Give users access to – personalised search service – email – Calendar and contact management tools – Maps – Office suite optimised for collaboration (word processor, spreadsheet etc) – Media players – Internet based file storage • Could develop some applications themselves, and some from third parties • New layer in the personal computing ecosystem • Since it will be hardware-agnostic, middleware tends to commodify existing PC operating systems The Software Opportunity – Replacement OS Develop a Linux based operating system open to third-party application developers Arguments against • Applications barrier – End users are unlikely to embrace a new OS until a critical mass of applications is available – Developers will not invest in applications until the new OS has a critical mass of users • Customer Service Requirements – Users will insist on support like Red Hat for a new OS • “who do I call when it breaks?” – Providing support to hundreds of million users a daunting task The Software Opportunity – Replacement OS Arguments against • Ecosystem Resistance – Efforts by Google to co-opt Linux could meet resistance from members of the open source community – Community would not be happy to see one computing hegemonist (Microsoft) replaced by another • Microsoft’s response – Provoke retaliation from Microsoft – Deep pockets and a track record of successfully fending off challengers • Consistency with mission – Developing a new OS not consistent with Google’s mission – “organise the world information and make it universally accessible and useful” – Wrt to useful, while Windows has well-know flaws, not obvious that Linux would offer dramatic improvements The Software Opportunity • Pursuing a new platform appears to be an attractive strategy • Opportunity to wrest control of the PC’s technical leadership from Microsoft • PC ecosystem was once characterised by divided technical leadership from several firms – Intel in CPUs – Microsoft in operating systems – IBM and Compaq in computer manufacturing – Wordperfect and Lotus in applications • Over time, Microsoft displaced leading application providers, and computer makers relegated to assembly role • Technical leadership concentrated in the hands of Intel and Microsoft The E-Commerce Opportunity • Past assaults on eBay’s marketplace by Yahoo! and Amazon were expensive failures • eBay could match Google’s bundle by joint venturing with either Yahoo or Microsoft – April 2006 Wall Street Journal published a front page article describing eBay’s negotiations with these firms • Conflict with values – If Google incorporated Base listings into its web search results, it risked compromising its neutrality and thereby violating its “Don’t be evil” rule • Consistency with mission – Google have to help merchants with complexities of order management, customs, shipping, insurance, payment processing – Did it make sense to channel Google’s energy and talent into such activities? Google’s Unique Organisation – a strength or a liability? • Don’t be evil – “Google does not allow ads to appear on our result pages unless they are relevant” – “there [can] be no compromising of the integrity of our results. We never manipulate rankings to put our partners higher” • Does being good have a cost? – “Don’t be evil” limits Google’s strategic flexibility A strength or a liability? • Any time Google makes moves interpreted as compromising its core values, management must defend its integrity – Few other companies are held to the same high standards – Few espouse their ideals in such memorable mottos • Problem will worsen as Google exercises its market power that threaten rivals and customers – Suffer a backlash akin to the fear and jealousy provoked by IBM in its heyday and more recently by Microsoft – In Google’s value system, “Don’t collect monopoly rent” and “Don’t crush weak rivals” are not corollaries to “Don’t be evil” – Google’s critics will conflate these rules and undermine Google’s credibility Case: Living on Internet Time: Product Development at Netscape, Microsoft, Yahoo! and NetDynamics The Traditional Approach Two Approaches to Product Development Project Start Concept Freeze Market Introduction Concept Development Implementation Concept Time Response Time Total Lead time The Flexible Approach Project Start Concept Freeze Market Introduction Concept Development Implementation Concept Time Total Lead time Response Time Structure of Microsoft’s flexible development process Sensing the Market Vision/Outline Functional Specification Design Testing Integration Alpha Release Beta Release Beta Release Stabilisation / Ramp-Up Final Release Development Process at Microsoft • Such highly flexible processes can be employed by competitive giants – not just small startups • Microsoft late to the party • Since it already had a flexible process, when Gates turned organisation’s attention towards the web, the firm was able to react with astonishing speed • Development approach of MS similar to Netscape and Yahoo! Integration • Team members quickly translate product features into a functioning prototype • User input continuously integrated into design through rapid “beta” iterations • Rapid integration of components into a system • System rebuilt every day to allow the product to evolve Sensing the Market - Netscape • Gaining continuous customer feedback critical – head-to-head race with MS in internet browsers • Release of six beta versions • Played a large role in “evolving” the product • Code, features and technology integrated into Navigator 3.0 release after the fourth beta version Sensing the Market – Microsoft • Rapid high-quality feedback on own intranet • Engineers are extensive users of technology – also fully familiar with functions and features of competitor’s offerings • Controlled external beta releases – for knowledge gathering – a way to avoid errors Integrating New Technology with Customer Preferences BETA 1 BETA 1 BETA 3 Product Release Initial Input TECHNICAL POSSIBILITIES CUSTOMER PREFERENCES The Development of IE 3.0: A Timeline Input From User Feedback Technical Search Specs Architecture Design Architecture Evolution Feature Design and Coding Development Starts Integration (Daily Builds) First System Integration Alpha Release Dec 95 November 95 Jan 96 Feb 96 Mar 96 Feature Freeze Public Beta 1 Apr 96 May 96 Public Beta 2 Jun 96 Release Jul 96 Aug 96 August 96 Input From User Feedback Technical Search Specs Architecture Design Architecture Evolution Feature Design and Coding Development Starts Integration (Daily Builds) First System Integration Feature Freeze Alpha Release Dec 95 November 95 Explorer 3.0 Jan 96 Feb 96 Mar 96 Public Beta 1 Apr 96 Public Beta 2 May 96 Jun 96 Release Jul 96 Aug 96 Spec Complete Start Full Release Input from User Feedback Objectives Feature Design & Coding Integration Stabilize Beta 2 Beta 0 Internal Beta 1 Navigator 3.0 Jan Feb Mar Beta 4 Beta 5 Beta 3 Apr May Beta 6 Jun Jul August 96 We want to run our business as though we were driving a car on the highway. The car is fast and, especially, really maneuverable. A lot of cars will follow us closely, all going very fast. Then we want to turn, quickly and unpredictably, and cause a big wreck behind us. Then we want to speed up again, but not too much, so that other cars will follow us closely again. Then we want to turn again and have another wreck, and so on. We need to remember that we can’t get out too far out front, or the others will see us turn too early Senior Manager, major software company Reference • Harvard Business School Cases