Cloudy with a chance of showers – the sequel

The GSX Blog

commoditization resized 600This is a quick follow-up of the blog I did on my interview on CMSWire earlier.

Now please, do not see any signs of narcissism in the fact that I am doing a blog on a blog I wrote on an article I wrote … but I received a few questions on tweeter which were basically asking “why some companies get acquired / divested in the technology sector” ?

So here are my two cents:

You and I are active on the technology sector. What used to be “hot” technology eventually becomes dull. This is what is called “commoditization”.

What is a commodity ? Contrary to what you think, it is not just a low-margin product. It is a low margin product which actually requires – comparative to the price of the product – an expensive amount to support and sell.

Technology products usually start their life as a high-margin product but with high “cost-to-serve”. I remember when I was a young student making money on the side spending entire afternoon installing Apple2 PCs at small shops / universities. My services were commanding good margins but they took up my entire Saturday … I also remember being a sales rep at IBM, when installing routers that supported TCP/IP to connect DEC minis with Mainframes with significant technical services was a “big” thing full of technical risks. The list is endless, even for those younger than me.

At some stage, the “cost to serve goes down. Products get better, easier to install and get running while margins remain high. This is a nice phase and innovation allows or should allow many companies to find ways of staying in this place. But at some stage, what happens are margins going down and then the product is less interesting. Full commoditization becomes when margins have become low and your client asks for “more” to buy from you, the “more” being free support, shipping, inventory, and payment terms. Margins are now low and the “cost-to-serve” is high.

(For those interested, have a look at this article by Harvard Business School Professor John Quelch)

Innovation is often the best weapon to keep a product from becoming a value product. But not all companies can innovate, and not all technologies are immune to external disruptions. So even for mighty powerful technologies, the doomsday of commoditization can happen: mainframe replaced by mini then by client-server then by software then by Internet/Saas/Cloud and now mobile.

When companies have on their product lines a mix of products which have diverse nature, the commodity and value parts do not mix well. Think of a shop that would sell expensive food and fast-food burgers in the same place on the same location. Neither would do any good. This is the same in technology, if your company is in the business of big, complex, risky system integration projects, it should not be the right one to discuss procuring cheap PCs. Your know-how and mastery of complex projects will be a key differentiator in the first case whereas having ready inventory and logistical capability to deliver will be key to success in the second one.

So HP is dividing itself and IBM has sold its PC and low-end servers to Lenovo.

These days, I personally spend quite a bit of time discussing with customers and partners the merits of BlackBerry Enterprise Server 12 for whom we developed in partnership with Blackberry a module of GSX Monitor and Analyzer (Check it out while you look at the value of BES12). Nine times out of 10 when I want to discuss Enterprise Mobility Server Software on “my topics”: pros and cons, integration within a corporate infrastructure, level of service, I hear comments, positive or negative on headsets. And it is likely you would do the same thing yourself. In other words, it is difficult even for those like us in the technology sector to separate the project and the device business.

Now, you can run a successful business even if you operate in a commodity space. You need however to run a company differently as if you are in the value space. Freeing PCs from IBM allowed this once struggling division to focus and be fully at home as part of Lenovo which is now number one in PCs (this blog is being written on one of their PCs). There is a very interesting video of BlackBerry CEO John Chen where he start analyzing the value from each of its business and comparing each of these with what Wall Street values individually.

So when the disparities in a conglomerate businesses become too big, breaking them up generates more focus and hence more value to everyone: shareholders, employees and customers. This why I felt that the impact of the cloud is so big that it will accelerate the commoditization of certain parts of large companies businesses and will force many to look at divestitures.


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