Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: hardware

Creating a Distribution Channel Where One Doesn’t Exist

One of the least well understood activities in growing a hardware or software business is the building of distribution channels. This looks very easy to the uninitiated, but in reality it’s extremely difficult. There are many subtleties that are far from obvious, and some aspects that are necessary for success are downright counter-intuitive. Building a distribution channel for your company is difficult in the best of circumstances.

How hard is it when there are no current, obvious existing channel partners already selling your category of products to start with?

It’s very hard. In fact, most people in the know would likely tell you to forget about it, and not even try. That might actually be pretty good advice, because this activity could easily become a real time and money sink if you’re not careful.

But the other side of the coin is that this might be the circumstance where building a channel carries the very highest potential payoff. One of the great truths I’ve discovered in my career is that the most effective marketing and sales strategies are the ones that haven’t yet become mainstream in your marketplace. Once a strategy or tactic becomes very popular, the results become watered down until at some point it’s marginally attractive at best. In terms of strategy, this move fits in the “high risk, high reward” category. But the payback, if successful, is extremely high.

In terms of strategy, creating your own channel definitely fits in the “high risk, high reward” category. Because while it’s very difficult, if successful, you alone among all competitors in your segment will have the leverage and resulting strategic advantage that a well-executed channel strategy can provide.

So the question is how do you go about this? Where do you even start if there are no existing channel partners for your category? Let’s take a look at a few places to mine that I’ve found some success in the past:

Adjancent Markets

This is the most fertile place to begin, imo. The first step is to think strategically about what type of software application or hardware product is complementary to yours. Whose product might it make sense to integrate with your own, for example? These types of potential strategic partners might also have existing channel partners that might be interested in selling your product as a companion product. An example scenario that I recently successfully implemented for a client was an analytics software company that uses a lot of data to help forecast and mitigate decision risk. We were able to attract a number of channel partners in two adjacent categories: Business Intelligence (BI) and Project Management. Both of these categories are large, with good-sized existing channels selling their solutions. BI creates a lot of date which could be used by my client’s software for forward-looking action, and the Project Management category involves a lot of complex decision-making and risk mitigation which was a natural fit for my client’s software.

Private Label/OEM products

Potential OEMs are another great place to look for channel partners. One obvious possibility is hardware OEMs for a software company, where the software might be integrated with the hardware for a full solution. If the hardware OEM has a channel, Voilà! you have a channel. Even if the hardware company isn’t interested in an OEM relationship, you might be able to entice them into a more vanilla reseller relationship with light or no integration. Lastly, you can always approach their channel directly to sell you software as an add-on product to the hardware vendor’s.

Former Employees

The first two categories above are pretty fertile with respect to creating a channel from scratch. After mining those two approaches, we’re getting into the area where you’ll need some really creative thinking. The first idea is former employees; I’ve seen many VARs who have started their systems integration business by specializing in their old employers products after leaving the mother ship. Another similar possibility is a former employee who lives in or moves to another country; they might start an entrepreneurial “exclusive” distributorship in that country.

Former Competitors

Very similar to the “Former Employee” category above is partnering with employees of former competitors whom you may know or come across. They will likely have similar knowledge and skill sets to your former employees, so the same type of potential applies. The only caveat here is you need to be careful of any existing relationships with your competitors or special agendas that could poison a potential relationship.

Product Fans

This category of prospective partner is again very similar to the former employee and competitor categories in terms of potential. A user or former user who loves your product and who you have a good relationship with can be a good candidate for an entrepreneurial VAR/distributor startup, whether domestic or international. The area to be careful of here is they may be very skilled in your product and some internal operating specialty, but may be poorly prepared to market, sell and run an overall business. This of course is a potential risk in the former employee and competitor categories as well.

These are some ways you can take the difficult step of creating your own channel from ground zero. Has anyone else tried this–what were your results? What are your ideas on how best to go about it? Please post a comment to expand the discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

1 Comment by admin on February 6, 2012
filed in Business Models, Corporate Strategy, Distribution Channels, Retail, VARs, enterprise software, hardware, sales
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Extending Your Technology With Spinoff Products

Many software and hardware businesses, particularly smaller ones, are religiously focused on a specific vertical market. As well they should; focus is one of the most important attributes that can bring a business from startup to a strong growing business. This is often one of the key areas I concentrate on with many of my consulting clients. Many businesses just can’t turn down any sort of deal, no matter what the effect it has on their existing product development plans or other key corporate initiatives.

But there is another side to the focus issue. Many tech companies have developed excellent, mature technology bases at huge expense. If that basic technology has a horizontal appeal, it can be quite profitable to spend a modest amount of additional effort to bring that technology to other adjacent markets that the company is currently not serving.

Care needs to be taken, of course, to not spread your marketing efforts too thin. But if you’re smart about it your company can increase, sometimes dramatically, the return on its product development investments. Let’s take a look at a few potential tactics, all of which I’ve used successfully both at companies I’ve run and with consulting clients:

Customize your products for adjacent markets

As an example, maybe you have an ERP software package aimed at retail markets. It might be quite easy to customize the product for other inventory-oriented businesses, such as distribution or service/repair businesses. By doing this you’ve created a potentially large new revenue source, at a fraction what building that product from scratch might cost. The trick in this instance is often marketing the product–read below for a couple of ideas on how to accomplish that without doubling your marketing budget.

Private Label/OEM products

Private labeling or OEMing your product to another vendor can be an excellent way to extend your product development ROI. It might be as simple as partnering with a non-competitive vendor who takes your existing product “as is” or with minor modifications, as well as changing the product identity and labeling. The target partner would be a company very strong in a market segment that you aren’t successful in, have no interest in directly marketing in, or simply is beyond your resource level. If done well, this is a win-win for both companies. Your company gets additional revenues with little to no additional costs (“pure profit”), while your partner gains additional revenue in it’s target market–without any product development investment.

Integration & bundling with other products

One of the best things a software vendor is to create a “developer’s version” of it’s product, which essentially consists of creating APIs (application programming interface) to the software. This allows easy integration with complementary software applications and even hardware. Back when I was CEO of a mapping software company with limited resources, we created a developer’s version which enabled both integration and bundling with a number of complementary applications, notably in the real estate and CRM segments. Once again, this tactic required only modest product development investment and enabled us to draw revenue from a number of different markets. We would never have had the resources to pursue these markets if we tried to build a new product from scratch as a company would traditionally do.

Different price points

Using my favorite mapping software company example, we were often forced to think creatively to wring out as much revenue as we could out from our existing technology. One of the other tactics we used was “de-feature” our existing $99 high-end consumer application to create a $9.95 version, which we then sold through mass market retailers of all kinds. Not only did this create more revenue, but the high volume business also created a bunch of opportunities to upgrade these entry level customers to our higher-end core product. This is a strategy I’ve used many times; you almost can’t go wrong when creating a larger customer base for your technology. I use the simplistic phrase “the more you sell, the more you sell” to illustrate the advantages of this approach.

Business vs. consumer version

At that very same mapping software company we used one other great approach to extending your technology: creating a B2B version of our consumer product which was aimed at road warriors such as sales and service professionals (the converse works just as well). The B2B version had a few additional features and we sold it via different channels and strategic partners. It didn’t have the unit volume of the consumer version, but the margins were much higher.

So there are a few ideas on how to extend the use of your IP to increase your overall ROI. What are your ideas on creatively utilizing existing assets to create additional growth? Please post a comment with your own thoughts so we can all benefit.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

1 Comment by admin on December 5, 2011
filed in B2C, Business Models, Corporate Strategy, Distribution Channels, General Management, Product Marketing/Management, Software/Product Development, Startup/Early Stage, enterprise software, hardware
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What’s Up With HP?

As regular readers will know, I am a Hewlett Packard alumnus and a longtime admirer of the company. I worked at HP in the eighties, and with hindsight it was one of the finest periods of my career. It was a GREAT place to work, as documented by books and case studies written about the company. My time there definitely had a major effect in shaping my management philosophies.

The more recent -periods at HP have seen a lot of change and a fair amount of turmoil not typical in the company’s first 60 years or so.

Let’s analyze some of the recent events and assess the overall strategic situation:

Firing of Leo Apotheker

What a disaster this was. To hire a new CEO with a major change in strategic direction in mind, then let him go in less than a year is not good. What isn’t known is was the new strategy totally conceived by Mr. Apotheker, or was he brought in to support a new strategy favored by the HP board. Either way, it’s an awful mess for such a major company, and the HP board has not distinguished itself in the last decade.

The new strategy itself while risky on the surface wasn’t the real problem, imo. The communication of the new direction was the real disaster, and smacked of incompetence. Don’t announce you’re “going to sell the business”–that does nothing for valuations. If you’re going to sell it, get on with it and sell it without premature public announcements. By most accounts Mr. Apotheker’s short reign was punctuated by missteps, retractions, chronically missing financial targets and general bumbling. My sources inside the company say that he had lost just about everyone’s confidence, from employees to shareholders to the board. It’s hard to say if that’s fair; new managers can be sabotaged by entrenched forces against change. And major changes were on the way. But the buck needs to stop with the CEO, and it certainly did in this case.

Planned Sale of the PC business

To be honest, I go back and forward on this one. Back in my HP days the PC business was a money-losing, also-ran business with tiny margins. The corporate line of thinking at the time was that HP HAD to be in the PC business, it was so central to everything else the company wanted to do, and the computing world revolved around PCs. I never bought it. In fact, the PC folks got in the way of many things we wanted to accomplish in the peripherals segment of the business, specifically connecting to and partnering with all the other PC makers.

The PC business remains a low margin one today, but one that HP has established a leading position in. I haven’t studied the balance sheet, but I doubt the PC business is so capital-intensive that it would prevent HP from having the money to adequately invest in a new direction. I don’t think selling it off is a stupid move, but announcing it as a first step seems extreme, and only served to make everyone involved nervous about what the future holds.

Eliminating the Tablets/WebOS

Another PR disaster and one that was totally avoidable. The problem was in buying Palm in the first place, and paying a billion dollars for a company that had almost completely failed in the marketplace. Then introducing a new line of tablet computers to great fanfare, almost immediately obsoleting them, and then announcing you’ll be making a few more because everyone love the fire-sale obsolescence pricing–it appeared that the left hand didn’t know what the right hand was doing.

By most accounts the WebOS is a nice piece of software. The problem is that this move was so very late to the game. If it had been done a few years earlier, it might have been a savvy deal, and allowed HP to make a major move into mobile devices with a differentiated product offering. But by the time of this acquisition, Palm was already discredited and Apple, Android and Blackberry had solidified the top leadership positions. And the price was completely ridiculous for as failed company. You can put this one on Mark Hurd, as it came on his watch.

Buying Autonomy

HP recently announced completion of the Autonomy acquisition, paying a dear price for this enterprise software company. Autonomy is a good acquisition if you’re intent on growing software as a share of revenue; the only issue is the price. It was very high, but one must remember that HP’s overall revenues are north of $125 BILLION. Autonomy adds less than $1B in revenue, which is a drop in the bucket relative to HP’s size. With a purchase price of over $10B, HP paid more than 11X revenues–pretty pricey even by today’s inflated SaaS valuations. Autonomy will have to be an exceptional growth in engine for this to pay off. Only time will tell.

Copying the IBM playbook

The IBM playbook was to sell off low margin, lower growth hardware business such as PCs (IBM sold its PC business to Lenovo, a shocking move at the time). Then focus on increasing software and services revenues relentlessly, for a long period of time. It’s worked extremely well for IBM, although I remember there were some tough times in the beginning. Would it work as well for HP, who appears interested in copying IBM’s strategy? I’m not a big fan of copying other company’s strategies, although on the surface the two companies are similar. The key to success or failure is usually execution in most cases of corporate strategy. Executing this strategy would also take a very long time to have an impact on HP’s financials. HP’s software share of total corporate revenue was less than 3% in 2010.  There are only so many $1B+ software companies out there. Most software acquisitions on their own will have a minimum effect on HP’s overall revenues, unless they went after one of the few industry giants–which would truly shock me.  HP has become strong in services after it’s acquisition of EDS in 2008, but is still much less prominent in services than IBM. So even with an aggressive acquisition program and strong organic growth, HP looks to be a hardware-dominated company for a long time in the future.

Meg Whitman appointed CEO

It’s hard to say what influence this will have on the corporate strategy. Ms. Whitman is a seasoned CEO who has been involved in great success, although one could argue that she was very fortunate to benefit from a snowball rolling downhill with Ebay. In addition, her background is heavily consumer products with almost nothing in the enterprise space, which is HP’s supposed new direction. HP’s business is only 25% consumer products, and if you eliminate the massive PC business, it becomes a whole lot less. I never underestimate smart people or their ability to adapt, and she definitely fits in the smart category. But experienced business people also tend to fall back on the comfort level of their past experience and what they understand best. It will be very interesting to watch as Ms. Whitman’s tenure evolves, especially how she affects the previously announced strategy.

What happens next?

I think that HP ends up keeping the PC business, while at least in the short term attempting to become more software and services intensive. You’ll see more software and services acquisitions. But I wouldn’t be surprised to see the flight away from consumer-oriented businesses to abate as long as Meg Whitman is CEO.

I also think that the original IBM-style strategy will be difficult–but not impossible–for HP to implement. For this approach to work, shareholders, employees and the board will all need to be very patient and supportive of the plan. Meg Whitman will really need to believe in it as well, and as discussed above, her background is far from a perfect fit for where they’re headed. My guess is that this strategy won’t be given enough rope for it to work and we’ll see another change of direction in the medium-term, but you never know. That’s what makes this kind of speculation so much fun!

What’s your take on the future direction of HP? Where are they headed, and does it end well or not?  I’m interested in your analysis of recent events at the company; post a comment to share your views and continue the discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

7 Comments by admin on October 17, 2011
filed in B2C, Business Models, Corporate Strategy, General Management, Mergers & Acquisitions, SaaS, enterprise software, hardware
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Strategic Implications of the Google-Motorola Mobility Deal

The big question is why is Google doing this? Media reports and analysis of the potential deal has been all over the map. Much speculation has centered on the real value being in the large Motorola patent portfolio, to help defend Android against lawsuits. There has been other commentary which points to the possibility of using the Motorola set top box business as an entrée for GoogleTV to finally penetrate the market. One pundit has even suggested that Google will eventually be giving away Motorola/Android handsets, in an effort to disrupt the marketplace and further drive mobile advertising revenue.

The only folks that really know are those inside Google, and they aren’t saying.

I’ve seen this called a “Bold” move–but it is Bold or a really bad idea? Let’s look the deal from several angles:

Deal Price

The price, $12.5B seems very rich to me for an also-ran commodity hardware maker, but I’ve of course not modeled it and done rigorous “what if” analysis like the quants at Google surely have. As mentioned above, a lot of the analysis of this deal has centered on Motorola’s 17,000 held and 7500 pending patents, supposedly to help defend Android against a recent spate of lawsuits. That’s a lot of patents, not doubt. But how many of them are actually relevant? A Motorola shareholder has recently filed suit on the basis of the deal being below fair value, so maybe my opinion on the deal price being rich is off base. Of course, anyone can file suit for anything.

Hardware vs. Software, Margins & Commoditization

This is the biggest issue to me. Google has a beautiful, high margin software business. In most cases, I am baffled when a successful software company wants to buy into or otherwise enter the hardware business, as I have written previously about Oracle. In addition to higher margins, software tends to commoditize much less quickly as well, as you can constantly tweak and go vertical with your applications to stay ahead of competitors. Motorola Mobility is in a high volume, hit-driven business which tends toward low margins pretty quickly. You can make money in this segment, but results tend to change quickly, and it really helps to be one of the big two or three market gorillas.

Android Licensees

Of all the negatives, this one baffles me the most. Google is positioning itself to compete with its customers–the Android licensees. I realize this is the age of “coopetiton” and all that. But from a strategic perspective, it’s far better NOT to compete with your customers and partners if you don’t have to. This strikes me as one of those times that it’s not really necessary. The Google pundits are spinning the story that Google can use all of those patents to defend the Android licensees against business-damaging lawsuits, so they’ve really done this FOR the licensees. Maybe this is true, but it sure smells like spin to me. I think that handset manufacturers will be much more careful about investing in Android-based systems going forward.

Apple vs. Microsoft

Google Android has been positioned as hardware-agnostic system software, which has allowed it to grow extremely fast and shoot past the Apple iPhone in volume. Think Microsoft Windows in PCs in the old days vs. the MacIntosh. Apple is the world’s darling now and Microsoft isn’t held in high regard like it used to be. Apple has always used a strategy of tightly coupling their software with only their own hardware. But Microsoft built a hugely profitable software business with 90% market share by following a software-only business model, centered on partnering with hardware vendors–and swamped Apple in the PC business. Of course, Apple has won big in some major categories recently with their favored approach. The final verdict for each of these two very divergent strategies isn’t yet clear in the smartphone segment.  How important is having the software and hardware under one umbrella in this particular market, versus the ability to propagate your technology more broadly with 3rd party hardware partners? We shall see.

Business Complexity

A software-only business is far simpler since you don’t have to deal with the complexities of hardware supply chains, obsolete equipment, and inventory forecasting. Because of this, it’s much easier to focus your resources on fewer key business drivers, and much easier to “turn the ship” when necessary. Google is getting to be a very large, complex business as it is. Adding hardware to the mix will only make it more complex, and harder to manage as a result.

What Does Google Really Do with Motorola Mobility?

I have seen a lot of speculation in this area, some of it ridiculous. As I stated earlier, One VC speculated that he expects Google to eventually give away free handsets to somehow drive advertising revenue. Although on the surface this seems to fit with the Google business model, it’s one of the silliest things I’ve heard, and a great way to lose money.  Google announced that they will run the acquisition as a separate subsidiary, implying somewhat of an arms length relationship. Like we bought it, but we’re really not going to pay that much attention to what they’re doing, let alone influence how the company is run. Right — I’ve got some really attractive swampland you might want to buy if you believe that one. They just paid $12.5B–fair price or not–it’s not exactly chump-change. I think they have some plans and will be actively involved. But what are those plans? That’s being held close to the vest–it will be interesting to see what unfolds.

There are a lot of different ways to look at this deal. So many angles to view it, and a lot of information about Google’s true intentions aren’t available to us. But remember, most acquisitions fail. My own feeling is that if the Motorola patents aren’t worth $12.5B, Google will regret this deal. And unintended market fallout could make them regret it even if the patents are that valuable. It would not surprise me to see Google jettison the hardware business in a couple of years.  I want to hear how you analyze this move, so post a comment to share your views on this deal and continue the discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

2 Comments by admin on September 5, 2011
filed in B2C, Business Models, Corporate Strategy, Mergers & Acquisitions, Software/Product Development, hardware
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Will Smartphones Replace PCs?

Smartphones are taking over the world–the tech world, at least. The computing buzz these days is decidedly mobile. The question is “where does it end”? Do Smartphones continue their growth until they are the dominant or sole computing platform, or does this trend stop somewhere short of that? Let’s look as some of the factors that will drive the market:

Processors

The state of microprocessors used in Smartphones will go a long way in deciding the ultimate outcome of this discussion. We’ve seen similar scenarios to the Smartphone phenomenon before, and history tells us that microprocessors will keep progressing on all three major computing platforms. History also says that applications have always grown in size and capability to take advantage of the increased level of processing power and memory available at a given cost. In addition, desktop PCs (and laptops to a lesser degree) don’t have the extreme power constraints that a pure mobile platform like a Smartphone does. If historical trends hold true, it won’t bode well for Smartphones becoming the dominant computing platform, because PCs will continue to have an inherent advantage in software capability due to more powerful hardware. If there is a leveling off in PC processor capability, Smartphones will have more of a chance to overtake them as the primary computing platform.

Screens

Screen size and power consumption are also very important to this argument. Until holograms become standard, screen size will always be an important factor is choosing where to do your computing. This doesn’t bode well for a total Smartphone takeover of computing.

Keyboards

Keyboards are an analogous issue to screens; once voice input becomes standard in the computing world, keyboard size will seize to be an issue, tilting the field toward Smartphones. But until this happens, all but the insane will prefer typing on a PC keyboard over anything available in the Smartphone world (although there have been definite improvements in Smartphone keyboards).

Batteries

Battery life is also a major driving factor in the capability of Smartphones. While mobile processors and memory will almost certainly continue to provide greater compute capability at lower power consumption, desktops essentially have no power constraints (except for the very green-conscious). Even laptops come with an assumption of working at least part of the time where they can be plugged in. There could come a day where batteries are so powerful and hardware is so miserly in power consumption that battery life is no longer a major issue. Until that day, however, the checkmark goes to PCs.

Software

There are two aspects of software that are important to this discussion. The first is the number and breadth of applications available–the Smartphone category has already blown through this checkpoint. Hundreds of thousands of applications are already available on Smartphone platforms. Smartphones are already in the mainstream from a software assortment perspective. The second question is the sophistication/capability of the infrastructure software available, to ensure whether bleeding edge technology can be used on a platform. While Smartphone infrastructure and tools aren’t t yet as powerful and mature as what’s available on PCs, things are moving fast and I don’t see this as a major issue preventing Smartphone dominance.

New Hybrid Smartphone/Laptops

This embryonic platform holds the promise of being a game-changer in the market, tilting the advantage towards Smartphones as your primary (and possibly only) computer. What I’m referring to is a normal Smartphone “docked” into a laptop accessory shell, providing a larger screen, keyboard and maybe even bigger battery while using the same interface and software available on your Smartphone. This allows all of your files and computing occur on a single device, which would represent a major breakthrough for users. It’s the holy grail of computing. You may have seen ads for one of the early models, the Motorola Atrix “Lapdock”; or heard about the recently announced ASUS Padfone hybrid Smartphone/Tablet. It’s still very early in this segment and definitely uncertain how it will turn out. As in any early market, prices are still high, and the early devices don’t quite work as well as you’d like. But the paradigm is a powerful one. If the companies bringing out these devices stick with it, continue to innovate and introduce next generation devices that meet market expectations, this is a product that could truly be a PC killer. Only time will tell if this category will become the next generation of computing, or peter out like so many other great ideas that weren’t carried out to the required maturity.

I realize that tablets are becoming an important part of the computing ecosystem, but for simplicity I’ve considered them a next generation laptop in the context of this discussion.

I can’t say I know how this eventually works out. If I had that type of view into the future, I’d be in Vegas placing bets rather than writing this article. But using history as a guide, I think all three major platforms–desktops, laptops and Smartphones–will be with us for a long while.

I do think there will be a re-alignment in computing market share among the main platforms. I see desktops continuing a slow decline in share and eventually becoming specialist computers, used only where the ultimate in computing power is required. Smartphones have already staked their claim as the new growth platform. How far this growth goes is the only question. The wildcard is the new hybrid category. I believe that these devices could become the dominant primary computing platform if the hybrid Smartphone/laptop category takes off–which is far from a certainty at this time. If hybrids don’t take off, I believe screen, keyboard and processor limitations will prevent Smartphones from becoming the dominant computing platform anytime soon.

That’s my forecast–what’s your opinion on the direction computing will take? Do desktops eventually go away completely? Are they replaced by a Smartphone/laptop hybrid device? Do two of these three platforms survive, or will all three co-exist in the future as they do now?  I’d be interested in your own forecast–leave a comment to further this discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

1 Comment by admin on June 12, 2011
filed in Business Models, Corporate Strategy, Software/Product Development, hardware, market research
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International Expansion: Partner or Invest?

This is an age-old question facing software and hardware companies. In this article we’ll examine the pros and cons, as well as the specific conditions that should drive your decision process.

Two basic options confront a tech company considering a foray outside of their home market:

  1. Set up your own subsidiary hiring your own employees to “put on the ground”
  2. Partner with established traditional distributors or strategic partners in the target foreign market

Let’s look at some of the key factors to consider when designing an international business development strategy:

Available Capital

How much money does your company have available for international expansion? If the answer is “not much”, this alone can be the deciding factor in your decision. If capital is very scarce, you’re almost forced to start out using distribution partners. This isn’t all bad, in my opinion. Using partners initially when you are an international newbie is a much lower risk way to start, and allows you to learn this part of the business without “losing your shirt”. I’ve seen a number of control-oriented management teams invest large amounts of money by putting people on the ground in subsidiaries, only to waste it in spectacular failure. Often this failure is due to inexperience.

Product Price and Complexity

If you have a high priced, technically-complex product with a long sales cycle, you will tend to benefit more than others by having people on the ground in the foreign market. These are the types of products which are most often sold directly, even in home markets. In this scenario, even if capital is tight and you can’t afford to put down a fully-loaded subsidiary with a dedicated direct sales force in every foreign market, it still may make sense to put some folks on the ground. As an example, you might be able to afford a channel sales rep and a couple of field engineers to support a large network of sophisticated local country distributors and VARs, across an entire continent like Europe or Asia.

Management Skills

What is the skill set of your corporate management team? If no one on the team has any experience with indirect distribution, for example, it’s going to be pretty tough to successfully build a working distribution channel in FOREIGN MARKETS which are far from home, in more ways than one. In this case, the most cost effective thing to do is to add someone to the top management team with the requisite skills and experience, or at least retain a long term consultant. Going without this hire often seems the cheaper route initially, but in most cases this end up being “penny-wise but pound-foolish” in hindsight.

Local Market Cost Structure

Each foreign market should be evaluated individually before deciding an approach for that market. For example, in large emerging markets with low costs (such as China, India, Brazil for many verticals) it may make sense to put your own people on the ground, regardless of the distribution strategy. When costs are low and the market is strategically important in the long run, the relative benefits of having your own subsidiary are high. In a high cost market with lower sales potential (Switzerland and Norway may be good examples for some businesses,) relying exclusively on a dedicated local partner may be a better way to go.

Availability of Partners

In some cases what may be the best strategy for your company and market in theory is overridden by facts on the ground. Many vertical software and hardware markets have a well established set of distributors and resellers dedicated to their marketplace. In these cases it’s relatively easy to find an appropriate distribution partner. But what if you’re in a business in which this ISN’T the case, which is not all that unusual? Or maybe there is an established channel, but you’re late to the game and all the obvious “good” partners are tied up with your competitors. Sometimes you may choose to not enter that market immediately. But if the geographic market is considered strategic, then you will need to choose a course that looks sub-optimal in theory. That might mean biting the bullet and outlaying the investment to start your own subsidiary. Or, you might find a local entrepreneur with the skill set to set up a new distributorship. If it’s a geographic market that you just HAVE to participate in, then you will find a way!

There are obviously a wide range of combinations and intermediate options, but “partner or invest” represent the extreme ends of potential strategies. In many cases (particularly large, established markets) the optimal distribution strategy will be a combination of these two main approaches: pairing a wholly-owned subsidiary with local distribution partners. In smaller markets, partnering with an established distributor or strategic partner may be the only viable strategy. In other cases, the optimal strategy may be dependent on the specific factors of a particular marketplace (local costs, available partners, etc).

What’s most important is to closely analyze your specific company’s situation and vertical market, as well as the “facts on the ground” in each individual geographic market. Resist the temptation to simply copy your competitor’s strategy or fall back on approaches that you are comfortable with from other vertical and geographic markets. That is how you make mistakes.

What’s your approach to international expansion? Post a comment and share your own personal experience.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on March 13, 2011
filed in Business Development, Business Models, Corporate Strategy, Distribution Channels, VARs, enterprise software, hardware
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Choosing an Advisory Board for your Tech Company

Advisory Boards have become a very chic addition to software and hardware companies over the last 5 or 10 years. So what are the key criteria you should use in putting together an advisory board? Well examine this issue below.

Prior to the 5-10 year period mentioned above, it was rare to hear of a company that had an advisory board. What’s driven this trend? For public companies, it’s mostly because desirable advisers who formerly would have served as on the Board of Directors may shy away, as a result of additional potential liability in that role. For private companies, I believe it was the recognition that those filling private company board seats primarily are there because of ownership (VCs, local angels, founders etc.), and may not have all key domain or technology expertise important to the company at the board level.

As a result, advisory boards are very much in vogue, sometimes to great effect–but often not. I’d compare this phenomenon to strategic partnerships. In strategic partnering, you’ll see everything from deals that greatly benefit both companies, to others which start and end with a vague press release. Similarly, many companies seem to put together an advisory board just because it’s the “thing to do”. This is just a waste of time, of course. Like most anything, if you put little thought and effort into it, very little usually comes back.

Let’s take a look at some criteria that could be useful in putting together your particular group of advisers:

Domain or technology expertise

This may appear obvious, but I see a lot of advisers on boards that are there just because they know someone, or maybe possess specific expertise that just isn’t core to the company’s success. I believe it is very important to use your advisory board to fill holes in your management team’s knowledge or experience.

Access to capital

This is a common reason that CEO’s will recruit an advisory board member, especially in early stage companies where capital needs are a critical strategic topic. But I’m not sure that this is always the best use of an advisory board seat; unless raising capital will be almost a constant need. I prefer to fill advisory boards with more scarce talents specific to the company’s market and technology.

Access to distribution channels

Distribution access is another common motivation in seeking advisory board members. I believe this is a very legitimate goal for your board, especially if the adviser truly has special access, or if distribution expertise is a real weakness within the company.

Honest and straightforward counsel

It’s very important to attract experts who aren’t afraid to challenge the management team’s view of the world and “common business sense”. Of course as advisers they need to be tactful in how they convey their viewpoints. But “Yes Man” panel that makes senior management feel good is of no real use, and can even be harmful by reinforcing a false sense of reality.

Available bandwidth

I believe this is a criterion that is very critical, and is often overlooked. I see companies rejoice when they are able to convince a high profile, “heavy hitter” to join their advisory board. While the name may look great on a company backgrounder or on your website, the reality is often that their time is spread too thin to be of real benefit to you. So make sure that you have a frank discussion, and reach agreement on what level of involvement they can actually have with your company.

Motivation

This is the most important criterion of all, in my opinion. Probably also the one on this list that is used the least in considering potential advisers. It’s easy to get excited about someone that fits perfectly what you need on paper. But you will find many folks that are interested strictly from a self-promotion viewpoint. It’s exposure for them, and looks good on their resume. There’s nothing wrong with this, as long as it’s not the sole or primary motivator. Others may think it will help them in getting to use their services in the future. Or they may have some more sinister reason for getting close to your company. So make sure that the candidate’s reasons for engaging are above board, and that your interests align. I’m not trying to create paranoia in anyone’s mind. But I believe that the adviser’s motivation is the single greatest indicator of success or failure in this role. Don’t ignore it.

So there’s some basic advice to consider when putting together your software or hardware company advisory board. Many of you have done this as well. Post your own advice, successes or horror stories in the comment section below so we can expand this discussion interactively.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

2 Comments by admin on December 7, 2010
filed in Corporate Strategy, Distribution Channels, Financing, General Management, Startup/Early Stage, hardware
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How Soon Should Your Software or Hardware Company Go International?

This is a question that frankly doesn’t come up often enough at early stage tech companies. There is usually an assumption that you first conquer your home market, and then sometime way down the road, when you are already flush and successful, it will be time to expand internationally. US-based tech companies are most guilty of this often questionable thinking.

What’s wrong with this approach, especially for US-based companies? After all, the US is the largest market in the world, and it’s far easier to sell to customers close by, then it is halfway around the world. With this the case, why should you use your scarce early-stage capital in a risky international expansion? This is how the thinking goes.

The problem is that you may be leaving significant low-hanging fruit on the table, at the very time that you need those customers the most. Let’s look at 4 important reasons to go international as soon as possible:

Reasons for Early International Business Development

Early adopters needed

As an early stage software or hardware company, you need to find early adopters of your product. These folks fit a certain psychographic profile, and they are rarer than the average customer. You sometimes need to cover the earth to find them. Limiting your geographic net unnecessarily only makes the job harder.

Distribution partnerships can provide tremendous leverage for a young company

This is one of the big reasons to go international that newbies don’t understand. They think that with all the money they are spending to penetrate the home market, selling internationally will be much more expensive yet. Not necessarily. In many markets, you can find distributors who will take on much or most of the marketing and sales load, reducing your investment tremendously and allowing you to leverage their existing relationships–rather than “starting from scratch”.

Many markets are less competitive than your home market, especially if it’s the US

Unless your home market is a tiny one, there are most likely many underserved markets available to you that have a lot of low hanging fruit. Why? Every startup software or tech company thinks the same and focuses initially on their home market. Since the bulk of the tech business is located in the US, it’s by far the most brutally competitive of all.

Beat your competition to the punch

Getting to a market early can often mean the difference between success and failure. If you’re the first one in a country or region, the early adopters and other low-hanging fruit are there for you alone. You will get your pick of the best distribution partners, and your product category will be “fresh” news for the media. Once established, it will be hard for later arriving competitors to push you down the market share ladder, even if they are larger than you overall.

So when should a company go International? The short answer is as soon as you can possibly do it. But what’s most important is to fully evaluate when “as soon as you can” actually is.

What to Evaluate Prior to Deciding to Go International

Your product must be stable

This should go without saying, but the only thing that causes a greater catastrophe than an unstable product is an unstable product distributed worldwide! Don’t do this–make sure things are solid before venturing away from where it’s easiest to “babysit” early problems.

Your product must be “market-tested” in your home market

While I’m a proponent of aggressive international business development at an early stage, there is such a thing as “too early”. Make sure that you know your product has a market before going far away from home. It’s a pointless exercise to be recruiting distributors and customers in foreign markets with a product that doesn’t really hit the mark, and one which doesn’t even had a reference customer list. If you can’t gain 10 or 20 or 30 customers close to home, heading far away likely won’t help.

Inventory or License only

Businesses that involve large amounts of inventory are one of my exceptions to aggressive early international development. That means hardware companies generally need to be more careful that software companies. Companies that distribute through retail channels involve more inventory than those who sell via VARs or direct, so they also need to be more cautious. The issues that come with inventory such as repairs and returns are exacerbated by borders and distance. So if you’re inventory intensive, maybe start with one smaller market rather than a large regional rollout, to test that everything goes smoothly before placing a big bet.

Direct or Channel distribution

If you have to establish your own local foreign operation, hire a bunch of people, rent office space, etc–you generally need to wait. Most startups can’t afford this type of risk and investment. However, although some feel this route is their preference due to control, it’s generally not mine. It’s quite risky and slows your international progress rate down significantly. Most companies can start out by using partners, and usually this is a good long run strategy as well. If you’re wildly successful and really feel the need for total control, you can always buy out distributors later on.

English or Local Language

English is the universal language of technology. In some vertical markets (such as IT software) English language-only products are fine. These are markets where you can make the fastest penetration after proving your product in your home market. If you do need local translations, they really aren’t that expensive in most cases and can be done quickly, and distribution partners can often help. But make sure that you don’t skimp on a good translation; nothing will hurt your local credibility more than language that isn’t proper, or at worst, makes no sense.

Safety, Legal or Electrical Specifications

This is also an area that can slow down the potential for fast international market development. Many countries or regions have safety or electrical standards that will require product modification or testing (and thereby investment). There are also legal aspects that need to be considered (European privacy laws when selling security or marketing software, as an example.) Don’t let these stop you from doing an evaluation of your international prospects, but these factors can change the calculus of your decision making.

SaaS

If you’re a software company using the SaaS model there may be very little downside to early international business development. If latency isn’t an issue for your product, you may need no international investment at all. Or maybe you need your servers hosted in other parts of the world to reduce latency issues, but this shouldn’t be a huge investment. You still need marketing in the local markets, either by your own direct (albeit remote) methods or through partners. But given the potential rewards, these investments should be a small price to pay.

Process or Cultural Differences

When you first go into a foreign market, it’s important to understand that you can’t fully comprehend the local culture, as well as how commerce functions. Listen more than you talk at first. Hire a consultant if you can afford to. Partners can also help greatly here. But if you are a savvy international business person it certainly raises your odds when attacking foreign markets early on.

Existing Demand

Are there customers “chomping at the bit” for the benefits your product offers? Or will there be a bit of an education process and a long sales cycle? Obvious existing demand is a key indicator for aggressive international business development.

The bottom line is that going international quickly can be a big boost to early growth for a tech company. Be careful, but not overly cautious. Evaluate your specific situation, and take the plunge if the odds are with you. What’s your take on the proper pace for international business development? Post a comment or send us your story.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on October 12, 2010
filed in Business Development, Corporate Strategy, Distribution Channels, Retail, SaaS, Startup/Early Stage, VARs, hardware, sales
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Is HP acquiring Palm a good idea?

To answer the question posed in the title, it definitely is if you’re Palm!

A long time player and sometime innovator in the mobile device marketplace, Palm was rapidly losing steam, market share and relevancy in the hyper-competitive Smartphone market. The company had staked its future on its new WebOS software platform and the recently release Pre SmartPhone.

 After a long period of decline due to an aging product line built on an obsolete software platform, the Palm Pre and its WebOS software was introduced to critical acclaim by industry reviewers and pundits. Had these introductions come a few years ago, they might have indeed turned around Palm’s fortunes.

 But competition in the SmartPhone marketplace has heated up to a white-hot level. After a promising early start, sales momentum of the new Pre products stalled, and this “last-stand” product introduction proved to be too little, too late. At nearly the first sign of Pre sales weakness top Palm executives began bailing out, while Telco partners quit promoting the product heavily, and it was also being dropped from the assortment of major retailers such as Radio Shack. The end was clearing in sight for this handheld industry pioneer.

In swoops HP to save what little shareholder equity was left. HP is on a roll, and in conjunction with their upward momentum they seem to be intent on acquiring everything available for sale, as well as competing in nearly every category of the technology business. This particular acquisition appears to me to be particularly high risk/high reward. It raises several key questions:

 Did HP pay too much?

Probably. The price HP is paying for Palm is about $1.2M, while most knowledgeable industry observers had placed the value below $500M. This is hard to understand for the casual observer, but you must remember that a company is worth what the highest bidder is willing to pay. Except for those on the inside of the deal-making, no one knows what the sizes of the competitive bids were. So it’s a bit pointless to speculate whether they paid more than they needed to. The better question is what is the intrinsic VALUE of Palm to a company like HP?

 A case can be made in this situation for bidding at a price that will prevent the transaction from dragging out. Software loses value quickly–especially in a fast-moving market like SmartPhones, and this is largely a software acquisition. Another big key to the valuation question is whether or not HP is able to hold together and retain the Palm team, especially the key developers. In most cases, buying a software business (which is the key asset of Palm) without the team is nearly worthless.

 Can HP compete in the SmartPhone business, and should they?

This is a huge question in my mind. Hewlett Packard is definitely becoming the 10,000 lb gorilla in the tech business. But even the biggest giants reach a limitation on resources, most importantly senior management bandwidth and market segment knowledge. IBM at one time looked much like HP today, competing actively in nearly every important technology market. Eventually IBM lost traction and did a painful restructuring focusing on services. Microsoft is huge and still dominant in software, but they’ve been far from successful everywhere they’ve invested. There are many examples in the tech business of competing in too many competitive markets at once. The often-used analogy (which still rings true) is to Hitler opening up a two front war by invading Russia. The old joke goes that had he been more focused, we might all be speaking German today. I am very skeptical of Hewlett Packard being able to win in all of the major markets they appear to be serious about at the moment.

 Can putting two losers together ever create a winner?

Not usually. I can’t think of a single high profile successful instance of this, although I’m sure it’s happened before. It usually doesn’t work in such a highly competitive market as SmartPhones, however. Palm was around 5% market share and fading fast.  HP is very successful overall, but its iPaq SmartPhone has less than .1% market share–I’ll bet most of you are shocked to hear that HP was even in the SmartPhone market prior to this deal! When there is a reason that both companies are unsuccessful, it’s very difficult to change the equation simply by combining. Mergers often create more problems then they solve, regardless of how good they look on paper.

 Having said all this, there is some synergy here. There is a belief is that one reason the Pre wasn’t gaining much traction was Palm’s precarious financial position. No one wants to carry around a phone that could soon become an orphan. The HP acquisition should help immensely on that front. Hewlett Packard certainly has the financial might, industry muscle and influence to improve the position of a well regarded platform like the Palm Pre and WebOS platform.

 Will HP be patient and persistent enough to win in SmartPhones?

To me this is the biggest question. If you asked me 10 years ago I would have said no. As a former HP employee, at one time this wouldn’t have been the type of market that I would expect Hewlett Packard to have success. But since them I’ve seen the company persevere for decades as an also ran in the low margin, down and dirty PC business, and finally push Dell out of the top spot. There was a time when Dell (and a few others) used to laugh at HP in the PC market–but that ended a while ago.

 I’m convinced that this ever more powerful version of HP can succeed in SmartPhones if they so choose. But as discussed above, even in a giant company like this, can they win so many tough fights across so many difficult market segments? That is a different question entirely–and something may have to give. They might not be able to win on all fronts.

 Bottom line

The bottom line for me is that HP can probably muscle their way into the SmartPhone market if they want to bad enough. But can they do it while they also compete with Cisco in networking, IBM in services, and Dell in PCs–just to name a few? Even for a successful industry giant like Hewlett Packard is today, I believe in the concept of “biting off more than you can chew”. That is the real risk. One thing I think for sure is that this won’t play out quickly. Only time will tell whether HP ultimately has the market knowledge, patience, tenacity and will to win in this hit-driven and brutally competitive market. What’s your take on this high profile acquisition? Post a comment to rev up a discussion.

 Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on May 14, 2010
filed in Business Models, Corporate Strategy, Mergers & Acquisitions, Retail, hardware
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Oracle is buying Sun?

Breaking News…. Oracle buys Sun!? What’s wrong with this picture?

What’s surprising is that a very large software company is buying a very large hardware company. You often see a hardware company buying a software company, but I can’t really think of a deal that’s gone the other way around. Certainly not at this level. My practice at PJM Consulting serves all kinds of technology companies–but a focus is on software. Although every situation is different, my typical advice is for software companies to stay away from hardware, if at all possible.

This news is very interesting on several levels:

Involvement of two high profile, strong personalities in the technology business
I’m talking about Larry Ellison and Scott McNealy. Of course, MCNealy no longer actively runs Sun, but he is still Chairman and a power to be dealt with. He was allegedly the force behind the killing of the potential deal with IBM. Apparently Larry and Scott are old buddies, so maybe there won’t be a problem. But these are two very strong-minded, controversial and sometimes outrageous leaders. Even though they are long time friends, they have never before played together so closely in the same sandbox. It wouldn’t be shocking to see a few disagreements, and some public drama as a result.

Combining the Largest Revenue Database Product with the Largest in Unit Market Share
This aspect of the deal will not get as much attention as some of the others. But Oracle is the 500 lb Gorilla at the top end of the market, and the open source MYSQL is the most popular database choice at the low end, particularly in website development. This aspect likely won’t demand anti-trust scrutiny because they don’t really compete directly. But potential marketplace competition from MYSQL going up market, and Oracle bringing out lower cost solutions, is eliminated by this deal.

Software Company buying a Hardware Company
As I stated above, this is highly unusual, especially for companies of this size. Most established software companies have very high margins, and wouldn’t want to “pollute” their earnings with the lower margin, often commoditized hardware revenue. I can’t think of another comparable deal, looking back even into the distant past. The business models are pretty different. In hardware companies manufacturing efficiency and inventory control are major factors in business success; in most software businesses these are inconsequential factors to success. Hardware businesses tend to be more capital-intensive, while software businesses are very R&D; intensive. I could go on, but suffice it to say that the management of these businesses includes different functional skill sets. Why is Ellison interested in Sun? Just for the Java and the Solaris OS software, or is he really going to continue with the hardware business as well? Even though in some ways, Sun was a bargain at the price of just under $6B net. But if he’s just interested in the software pieces of Sun, the price looks pretty steep–Sun’s direct revenue from Java and Solaris is a pretty minimal portion of its total revenue. Ellison had a flirtation with hardware years ago with the Network Computer concept–could he really still be itching to become a fully integrated systems company?

What will Oracle Do With Sun’s Software?
To me, this is by far the most intriguing question raised by the deal. Solaris is a nice OS, and has a good installed base. But it’s never really had the same impact in the market since open source Linux came around. Java is pervasive in the computing arena, and in embedded systems as well. It has a huge impact on the Internet. It’s literally everywhere. But after trying to charge big money for Java in the early days, Sun decided to give it away. I was intimately involved in the embedded Java market in those early days. Sun initially looked like they had created a technology that could allow them to challenge Microsoft for computing dominance. I believe Microsoft was very worried at the time. But to say that Sun fumbled the ball would be way too kind. Frankly, their effort to commercialize Java was like something out of the Keystone Cops. I could detail their myriad missteps. To summarize, the biggest problem was that they were a hardware company attempting to commercialize a software product, which usually doesn’t work very well. Sun appeared not to have a clue as to what they were doing. Finally, they quit trying to directly make money at Java; they put it into open source and basically decided to give away the technology to anyone who wanted to use it. It looked to me like a way to spite Microsoft, more than anything.

What Happens to Java?
So where does that leave Oracle once they close the deal and own Java? What is their plan to leverage Java in the marketplace? Will they start trying to charge for it somehow? I think this is doubtful; there’s probably no going back on that decision at this point. I’m sure that Mr. Ellison and his team have something in mind–but I can’t imagine what it is. They’ve been very savvy at making some acquisitions that haven’t looked all that complementary, that have worked out well. So I wouldn’t bet against them. But I can help wonder if they haven’t stretched a bit too far in their minds to find synergy in this one. It reminds me a bit of Ebay’s very expensive purchase of Skype, which is now being unraveled because it just didn’t create any synergy. We shall see what happens–it should be interesting to watch this unfold.

SUMMARY
The prospective Sun-Oracle deal is one of the more interesting we’ve seen for a while. There shouldn’t be any major anti-trust issues with this deal, and it doesn’t appear that a higher bidder is likely to emerge. Watching the organizational integration (and possible divestment), as well as the interaction of the outsized personalities, should be entertaining at the very least. But most of all look for what Ellison does with Java–that’s where the real intrigue lays. Post a comment to give me your view of this deal.

Phil Morettini
PJM Consulting
www.pjmconsult.com

1 Comment by admin on April 22, 2009
filed in Business Development, Corporate Strategy, Mergers & Acquisitions, Software/Product Development, hardware
tagged , , , , , , , , , , ,
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