Friday, March 30, 2007


How am I doing with my research?

It's about time I spoke about where I am with my research. It has been a tough journey but the research is beginning to take shape at last.

My first section concentrates on the supply chain of physical products and what this means for organisations. What I argue is that supply chain management is based on the laws of physics, such as the law of conversion of mass, etc., and this in turn leads to all sorts of different artifacts (processes, technologies, facilities etc.), that are absolutely essential in order to compete successfully.

Next, I turn my attention to software as a product. The difference with software is that it is virtual, and therefore the rules applying to physical goods don't apply so much. The case is made that things seem so much simpler when selling and distributing software over the Internet. But that's not my thesis - my thesis is that new, very different, challenges appear, and it behoves managers to understand them well in order to avoid failure when selling and distributing online.

So what are the challenges? Is it just a case of sticking it up on a website and waiting for the money to roll in? I think not.


I have uncovered the following issues:

a) Technological Compatibility: End-user technologies and platforms are continually changing, so what might seem to work in-house is not necessarily guaranteed to work at the client site. Software companies need a way of controlling the client environment so that the software has the best chance of installing and executing correctly. Testing methodologies need to be developed that are in tune with client environments. This can potentially add overhead to the software release process.

b) IP Protection and licensing: The fact that every client machine is a software factory with infinite capacity to produce 100% perfect copies of your software presents a major challenge to software companies. Sophisticated licensing approaches are required involving both technological, legal and business measures. The key thing, I think, is developing a relationship with the customer of your products. Although it is easy to copy software, paying customers are not so easily copied, and once you have their attention it's the service you give them that will dictate the future revenue stream.

c) Bandwidth. In 2007, it is not possible to distribute software instantaneously to all customers. Different countries, regions and customers differ wildly in terms of downloading ability. Some are on dial-up, some on broadband and some don't have any Internet connection at all. Despite Moore's Law, the roll-out of broadband has been hampered by regulatory and anti-competitive factors. Many commercial software products require multiple gigabytes of disk-space, so downloads can long, painful and unsuccessful. Technologies such as BitTorrent offer potential solutions over the medium term, however physical distribution (CDs, DVDs) cannot be entirely discounted for a while yet.

d) The importance of "free". Software product companies need to understand the importance of giving away some of their product portfolio for free. There are a number of reasons why this is the case:
  1. Software, like most digital goods, is known as an experience good - to assess the value of the product, the customer has to experience it first of all. A free sample is the best way to do this.
  2. The marginal costs of software are practically zero, so "selling" certain products at zero price is feasible.
  3. The industry has pretty much dictated that software be provided, at least initially, for free. If you don't do it, your competitors will. Commercial software companies are alert to the fact that certain competitors (open source etc.) are providing software to customers for absolutely no charge.
  4. The dynamics of customer lock-in are enormous with software, so it's important to gain a high degree of market share quickly. The easiest way to do this is to give your stuff away.
The challenge, therefore, is in understanding how money can be made - how the product can be commercialised - how to develop a sustainable business model - in such an aggressive environment. Pricing is a difficult, but important task. Typical approaches include premium software versions, disabling the free versions in some way (by time, functionality, usability etc.), so that downloaders will be enticed to move onto a commercial model at some time in the future. In addition, the service aspect of software cannot be underestimated - developing a relationship with the customer that offers them much more value than would be available from a copy of the software on its own.

e) Sustaining demand. Here's the problem: you sell your first copy to customers. It's well received and you gain a significant market share. Then you sell your first update, then the next one and so on. In the eyes of the customer, is there real value in these updates? Because if there is not, why should they continue to update? Many software companies see drop-offs in software updates over time, partially due to this value reason, but also because it's so easy to forestall on an update if economic times are hard. Innovation - continuous innovation focused on customer value - is extremely important. In addition, the software product company must look to services to maintain a robust revenue stream in good times and bad. The customer needs to comes first, not just the product.

f) Partnering. It's rare enough that a software company can satisfy all customer requirements on its own. The existence of common (open or de-facto) standards provides an unprecedented ability for software companies to get together to develop and market products to their customers. Partnerships are extremely important in the industry and there is a trade-off to be managed between taking all the revenue for yourself, and sharing it with other companies. Managing these partnerships, getting the contractual mechanisms right and aligning the work-flows are a challenge.

g) Globalisation. When you release any product on the Internet, it's immediately available to an online audience. However with software, customers (and competitors, and criminals) can download it and use it immediately. Software companies need to go global very quickly, or at least need to think carefully about global issues when releasing their software. Localisation is a challenge, global pricing is a challenge, and issues such as international marketing and international law also need to be considered.

h) Management funding and knowledge. Another thing I have discovered is the management perception that "distribution is easy" - limited resources are invested in the distribution process and release time-scales are greatly limited. Software companies often perceive themselves as development and marketing companies only, with "the bit in the middle", i.e. getting the software to the customer and providing regular updates thereafter, seen as something of an afterthought. This is pity because distribution and deployment, done well, offer software companies in particular great possibilities in terms of customer integration and feedback.

Next steps

I am in contact with people in the industry to help me to validate these challenges, and possibly add a few more challenges to the list. I am also interested in what order companies perceive their greatest challenges to be and in understanding the responses to these challenges

Finally I need to look at the role of supply chain management in an industry that is quickly moving from physical distribution to Internet distribution. Is it dead? Is it irrelevant? From what I have uncovered so far it is not. Look at it from this point of view: supply chain management is about alignment of goals, processes and people. It is about management of physical, financial and informational flows. It's about giving the customer what they want when they want it. It is a philosophy that concentrates itself on the external environment, rather than simply the internal. Software companies need all of this in abundance. It may not be so important to watch every copy, or even to care where every copy is, but it is important to maintain coherence and competitiveness in a very fast-moving industry.

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