Dinosaur Defense Strategy / Consumer Software Companies

A colleague who works within one of my company’s clients writes this email to me about a month ago:

“I still find myself scratching my head at how to apply this line of advice (referring to a white paper I sent on permeable markets) to a large highly profitable business. In the last session [Spark 1.0], somebody described Web 2.0 as a way for start-ups to crash a $1B market to $100M and then taking a big share of that. Great, unless it was your $1B market, right?”

And so he goes on to ask, “what should a highly profitable, existing business do” [to either defend or take advantage of web 2.0 and all the related (underlying) business models that are developing today].

Perfect Blog Topic, I thought!

First, off, let me share some context for what I think is happening in the industry. And then what to do about it if you’re one of the big high-tech software or solutions firms. (hardware is a different game as it has different economics of scales; therefore hard to defeat by nimble players). Incumbent firms often continue building more feature-rich products and services to better serve familiar and profitable customers. I would suggest that is what Microsoft is doing today with Vista, what Macromedia used to do with Dreamweaver and Flash, and what SAP has done with Netweaver. As soon as a product becames the category (default use) leader, it means the company could practically print money. The professional or high-demand users absolutely get hooked on the product, and everyone else used it as the standard. Used to be the economies of doing software were such that a small innovator fundamentally couldn’t come into the market viably. You couldn’t possibly create a product, do enough QA testing, build a channel to get your products to customers, make it feature rich enough to compete and displace an existing vendor. All that has or is about to change.

Software firms once they “win” a market have one achilles heel. Incumbent, established firms often “ignore” low-end users until they absolutely positively can’t afford to keep ignoring them. When I was at Autodesk, I saw several transitions. One was the release of Autocad LT (light or lite as some referred to it). Autocad was a $2500 piece of software and all professional architects, mechanical engineers, etc used the product. Carol Bartz, once CEO now Chairman, once described Autocad as the product “that created everything that wasn’t invented by God”. And that would have continued until a bunch of companies started creating lower-end products. Because of course, not everyone needs a $2500 product. Especially those that are “hobbyists” need to have something for an occasional use that can still be opened by the industry standard. These hobbyists or recreational users of software want to do one or two really interesting things but they don’t need a full app. If anything, the full application gets in the way of doing the one fun, creative thing. So only when Autodesk had competitors (namely Microsoft with its Visio offer) coming into the market, did they create a hobbyist version, called LT. Notice in my example, it took another big firm to become a viable competitor.

So okay, let me recap my long story.

  • Older software companies, once established usually price optimize because they have few competitors.
  • Older, established software companies typically build bigger and bigger applications. Look at Vista. Came out in 2007, 6 years after their last release.
  • Barriers to entry in software used to be very high. Big software firms fought with big software firms.
  • The “low-end” or hobbyist consumer or user was typically the one hurt by all this. They only need the product at times, and so “overpay” for software.

Web 2.0 allows a few things to happen.
1. Really small companies can innovate faster using new tools (Ajax). So it’s not a big deal to create something cool. With mash-ups, really fast iterations are possible with companies building on top of one another’s technology. Remember that some of this can use Open Source technology. Thus a small company can do something that used to be reserved for big companies.
2. Single use software that’s perfect (and often free) for doing a specific task is readily available. Thus replacing the need to buy a package.
3. With aggregator sites like Google and Yahoo (and many others), it’s very easy to let users use your stuff without needing a formal point of (powerful) distribution and channels.
4. Because of different economic models in place, it is no longer necessary to sell software to make money. You now have different economic ways (advertising, subscription, etc) to monetize what software is made.
5. People talk more easily in this era. So only a few people need to know for the fire to spread. Multi-million dollar marketing budgets are good but can be circumvented.

1. Remember that category owners can be displaced by better value propositions. Like Cisco got challenged Juniper Networks or Oracle got challenged by Siebel. Today, a software company can get displaced by a different business model as much as a cooler feature. This hasn’t happened in nearly 20 years and so this current leaders in business don’t know what to do.

2. By not serving the average or dilettante user, any company leaves itself exposed. It may not make sense to go downstream to a consumer or a mid-or SMB market for revenues or profits, but it almost always makes sense as a defense move. (How you do a move like this is key to maintaining profits, by the way.)

3. Category killers are typically things that optimize supply chains. Remember that the lower prices of jetblue and southwest have caused the Uniteds, Americas and companies like PanAm (no longer in business) to be challenged. Web 2.0 is the category killer of software development. With it, software costs of development and QA are turned on their heads. For those companies that think this new model is about “software as a service, you are so missing the fundamentals.

Glad you stayed with me! I’m going to break my “what to do” answer into two pieces. One is the platform and technology side. The other is the user and market side.

1. If you haven’t already done so, you should open up your APIs.
By enabling your technologies and standards to be used or leverage, you ensure people don’t spend their creative energy coming up with fresh new technologies and standards. Web 2.0 includes a dimension of agile development, whereby developers will use the available building blocks and tools to create “mashups” that will become increasingly useful and business focused. Think if this as web 2.0 on the supplier side of the equation. How will a company like Adobe or SAP transition, profitably, to an environment that won’t stand still for 18 months to 6 years while the next behemoth cycle is completed. Many companies are missing this conversation by not releasing mashable code. Do it, and do it now. There’s now two interesting sites to pay attention to: www.programmableweb.com, and www.go2web20.net which lists all the new web 2.0 companies. Go recruit these guys to build on top of your code and suddenly you avoid becoming obsolete.

2. Figure out a way to make money “on the side”.
Seth Godin has described this set of economics as “The because effect” — as a kind of jujitsu. While other people look to make money with something like software, you’re finding ways of making money because of something (user interactions with a website). There’s at least 3 new business models at play today as different from the “sell something” model. Most companies are not having this conversation on what could be done to create different economic models. I put this under platforms because it’s clear that you don’t do this alone. You could allow your developers, your partners, your suppliers be a part of that solution. And that’s the sheer genius of it when it is figured out, it becomes volume based much like the traditional software model of yester-year.

3. Change your software creation model.
Move from packaged software to services. That way, you can earn money as you add and upgrade features. Don’t let time become your enemy to wait until something is “perfect” before release. Look for iterations so you can be more nimble. This is as much a philosophy than anything. And it’s entrepreneurial, a little more risk oriented but for sure it’s more creative.

4. Work on component software development.
No one who knows me would ever think I’m a technologist at heart. (I wear too cool of shoes, which surely gives me away). But from what I know of Ruby on Rails, Ajax, and the SOA waves of tools, applications and philosophies, there is no way someone still doing code in C++ or Java could compete.

5. Change the way you arrange work of engineers and product management.
Right now, the cycle between what is designed and then put into a huge process of priority setting at big companies will be the death of you. Set up smaller teams, and become component focused yourselves in how you create new tools and share them. Become the team that posts to one another what you can use. Make those teams “permeable” to one another. The old model had product management gather requirements then at some point create an MRD and then meet in a conference room, and meet some more and then Engineering would come back with their PRD which leads to Specifications and blah, blah blah. Figure out 3 month cycles of what you’ll innovate on and then become seamless in talking, creating, gathering insights and making reality. Organize these teams into one big floor of a building (tear down the walls) where you can feed off each other’s knowledge and energy.

1. Use the Web Community to Discover New Usages
The “circumstances of use” are more visible when you have an ongoing conversation with your customers. Web 2.0 enables this conversation. If you can learn what people are doing with stuff, you can find simple ways to serve that need as a one-off tool. It’s what Picasa is to Google users that Adobe could have been if they had been willing. Go to user community sites, encourage those to exist. Stay present in the crazy dialogues to find the few cool ideas worth doing.

2. Get Out of the Castle Grounds!
I’m amazed at any company CEO who doesn’t blog today. And you know why? Because it’s the easiest way to have an ongoing dialogue and let people know what’s your mind, what you’re about, and why someone should care about you and your company. I think the “old days” were we had official meetings and customer tours. And while I value the efforts and professionalism of those efforts, I recognize there was a facade going on. Who do you have more connection to? The suit, or the person who wore their grandfathers tie to work that day or shared their story of what matters and why they’re making certain decisions. Any company CEO or exec team that isn’t engaging in this kind of genuine exchange is living in an ivory tower and the peasants really don’t want to pay money to the castle anymore.

3.Build your Alpha User Community.
There’s always a very small percent of passionate advocates in a category. I’ve written a lot about this already and it’s been well received by experts focused in this area. The key point is this. Influencers know what they want, they can point it out, and if a company ever figures out who they are, and how to harness them, they’ll have a gem in their hand.

4. Let users set the experience.
We marketeers have typically done the “3 or 4 or 5 segments” for any product area. That’s because that’s all we had. Today, users can tell you what they care about. It could be the same person cares about cats, cleaning products, font disciplines, technical manual production mechanism, and vintage teddy bears circa 1920s. You couldn’t possibly know that with some broad brush survey. So my big question is what are you doing to let the user tell you what they want / need / seek from you? This should change the way you organize your website, send emails and invite them to events. It should also change what content is displayed when a new user comes to the site vs. an existing customer. I am always amazed when I go to a site I go to repeatedly and it makes me go to their same standard home page. While I understand this is good for them, what it is is … good for them, and it lengthens my experience and makes me take their road. The bottom line is that I, like many others, focus on certain things and shop for / research nearly everything online. I am not unusual in looking for a highly targeted experience. You’d think that by doing that, I might be reducing my interaction with you as a company, but the reality is that I’m getting better served by being able to come in and out. And that’s the point! You gotta change your mindset from “they searched 12 pages of our site” or whatever weird metric is about you to what did the user experience and what did it cause them to do because of it.

5. Bring in Advisors to Learn the Best of the Best.
I’ve worked inside high-tech now for a long time. Nearly 20 years of this, and I can see one thing. CMOs and VPs of Product Marketing, etc listen way too much to each other and to what the internal dynamics of the company say is important. They look at spreadsheets of data to analyze the rear-view history. It’s not that I don’t think ALL of this is valuable; I do. But it shouldn’t be the thing you’re paying attention to as you go forward. To go forward, you have to create a new set of possibilities and options. There are innovators of web 2.0 business strategies, brand experience, user input, customer engagement, user community building and loads of other things every day, outside your company. Find the ones that matter to your business, talk to them, hire them as consultants, bring ’em into your staff meeting as advisors. Focus on learning the very best ideas, and not on knowing it all, already. The market is moving and by having an illusion that you have it all under control is just that, an illusion. So stop focusing on what you already know and learn what you need to know. Remember that no one party will have the answers already done for you or that there is one answer. The key is to figure out what key questions matter to your situation and then start the dialogue to get those answers.

The goal is to engage with really wise people you find, and then dialogue. You bring you assets (knowledge of what you’ve already considered) and the other party brings this fresh but incredibly learned perspective of what is possible and what others have already piloted and what appears to work and not. You don’t write an email that is one-way but create a conversation (two-way) so you learn as you go.

And in case it’s not obvious, what you should absolutely not do is …. stand still.
So what do you think? What would you add to this list for my colleague?

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