Felixforge for Strategic Marketers

Customer expectations in 1954

 

Marketing mix #1 - technology partnerships

This weeks look at the marketing mix is a casestudy on distribution, in particular the open source database market where the product is becoming a commodity and database vendors need to consider the customer relationship carefully.

The market demands greater efficiency in all sectors of the economy. Industry reacts to that demand with initiatives such as ‘outsourcing’ and ‘consolidation’ to reduce the cost of production and pass that benefit back to the consumer. One efficiency initiative that has seen particular growth in the software industry has been the ‘open source’ business model. The premise is that making the code openly available to all will enable the user base, or community, to set the direction for the product making it more customer focused. The efficiency benefit to that same community is that the product will be license cost free, reducing the total cost of ownership (TCO) significantly.

The software industry value chain can be broken down into three segments. The first and the most mature is storage, which includes database and database tools vendors. The second is middleware, where the application server and security vendors play. The final segment is the application layer which can be web based or client / server architectures. Any technology solution will encompass each part of this value chain, and with thousands of vendors the network of relationships is becoming more and more important.

This article will explore how open source vendors, particularly those in the storage and middleware segments, must take advantage of their network of technology partnerships in the value chain. This maximizes the efficiency in their operations and in turn passes that benefit back to the market in the form of cost reduction and customer focus.

The Hungarian writer Frigyes Karinthy first coined the phrase ‘Six degrees of separation’ with the hypothesis that each person on earth could be connected to everyone else by no more that six associations.  In 1967, American sociologist Stanley Milgram  devised a new way to test the theory, which he called "the small-world problem". He randomly selected people in the mid-West to send packages to a stranger located in Massachusetts. The senders knew the recipient's name, occupation, and general location. They were instructed to send the package to a person they knew on a first-name basis who they thought was most likely, out of all their friends, to know the target personally. That person would do the same, and so on, until the package was personally delivered to its target recipient. The result in all cases was that the recipient was reached within six people associations.

What this experiment was able to demonstrate was the strength of ‘weak ties’ or the ‘network effect’. In finding a solution to this problem (sending a package to an unknown recipient) the sender could not use his best friend but had to use his most appropriate associate. In this case someone who lived closest to the recipient.

Now consider the software industry and in particular open source software vendors. The value chain with its three basic segments creates degrees of separation from the consumer. We can look at these degree of separation as choices that can be made by software vendors as they hunt for more efficient ways of engaging the consumer. 

The relational database market is mature to the point that analysts often use the term ‘commodity’ when referring to this sector of the software industry. There is very little growth and very little opportunity for new business. To satisfy shareholder requirements for increasing returns growth has been achieved through merger and acquisition activity for the larger players.

In the growth period for this layer vendors had a direct relationship with the customer or one degree of separation which was most effective and maximized profit margins. Today the database industry looks very different. New database sales, with one degree of separation, mostly happens if the salesman can displace the incumbent vendor. Migration costs and internal politics makes this a challenge. Add to that the price pressure in a commoditized market and the sales model with one degree of separation is too high a cost and won’t scale readily.

After the rise of the storage industry, then came the growth in middleware; managing and delivering integration of business processes. The customer had automated the storage market and now turned to their IT processes. This lead to the rise of application server vendors and placed two degrees of separation between the storage vendors and the customer.

The middleware vendors now interface with the customer, reducing both the logistical and marketing costs  for the storage vendors. In turn the storage vendors are benefiting from the network effect of this separation from the consumer. The focus for the storage vendors is then to build a strong channel management program so that they can benefit from the weak ties that exist in this new network.

Customers, in general, don’t buy new databases; they buy applications with databases embedded in the solution. The application is the ‘touch point’ for end users; it’s where they see the most value and, because of the process improvements, will deliver significant ROI.

There is no commoditization in the application space. It is relatively immature with high growth rates. With this third layer or three degrees the network effect is amplified again, allowing the storage and middleware vendors to really explore the strength of weak ties. Once these three layers are integrated we see the emergence of technology stacks giving customers a true end to end solution.

Combining these three layers in a single solution has benefits for both the vendors included and the consumer. The storage and middleware vendors (storage in particular) benefit from the weak ties and network effect that is generated. This reduces their sales and marketing costs significantly which is a benefit that can be passed to the application layer and in turn to the consumer as a lower cost of ownership.

This ‘packaging’ has lead to the emergence of technology stacks in the software industry, providing true efficiency gains in the value chain. Technology stacks enable the rapid deployment of applications and reduce the on-going maintenance costs of those technologies.

Reducing the sales and marketing overhead within open source vendors is critical to the commercial success of those organizations. This is driven by the lack of license revenue, which would ordinarily be the major contributor to overhead. The benefits of weak ties and the network effect both help achieve this but open source has another card up its sleeve.

The challenge in exploiting weak ties is to build open and common standards for all participants. This is the crucial ingredient that will allow vendors in each layer of the technology stack to build solutions that customers want and in a timeframe that they desire. Software has traditionally been built in a proprietary manner, so that vendors could benefit from protected differentiation and remain competitive. This has lead to many different platforms and standards being offered to customers who then have the challenge of integrating those products into a single solution. In this situation there is no benefit of weak ties. Open source vendors now have the opportunity to provide a true open and common standard for the software industry. The future for software vendors is less likely to be maximizing IP value and more about how they “go to market”. In this case having open standards allows the market to benefit from the network effect. Vendors can execute faster and more efficiently; consumers have solutions that are truly integrated. In this regard, open source vendors are leading the way.

Chris.

Steelheads

Listening to the radio this morning I heard one of the most amazing stories that I can recall. It defies logic and nature. I am desperately trying to tie it into a strategy model - lets see how I do later.

In Washington state there is a bountiful supply of Salmon. They fall into two distinct types - Rainbow and Steelheads. It seems that new born salmon make a decision about what species they want to be at hatching. Either they turn up stream and become a Rainbow and grow to about 5 lb's maximum or they turn downstream and head out to sea where they grow upto 20lbs and become Steelheads. Here is the amazing part. Two rainbows mating can produce a Steelhead and in turn (as a thank you) two Steelheads can produce a Rainbow. This is one of the biggest enigma's in aquatic science to the point where something unbelievable has been suggested. A forced extintion of Steelheads to see if the population would re-emerge in the future.

This story is just sensational. That a species can choose to give birth to another is overwhelming.

There is no strategic angle here - unless you can think of one. Maybe there is a genetic angle for the biotech industry to create superhumans (I can feel a new comic strip hero - Steelhead - already brewing inside me).

Chris

Where's the Milkman?

I am British but I live in the US now. Each morning, whilst I was growing up, I would be woken by the sound of a 'milk float' - an electric truck that milkman use in the UK. It is a very distictive sound. I have been in the US for many years and on a recent trip back to the UK I heard that familiar sound again. It suddenly occured to me - I have never heard that sound in the US or even heard of a milkman. What is so different between the US and the UK where large distribution firms can make a profit delivering one product (although I hear they now deliver fruit juice and eggs aswell)in the UK and no firm has exploited that in the US?

Milk is a very important commodity in both economies. Looking at the "got milk?" campaign run in the USA (www.whymilk.com) and the "3 a day" campaign in the UK (www.milk.co.uk) leaves no doubt that both countries value milk's nutritional benefits. But why is there one huge distribution choice that is so different?

How can it be economically viable that the delivery of one item each day (at a cost of $1 dollar per bottle) add up? There is only so much milk the average houshold can consume. But it is viable because this has been happening in the UK for over 50 years...no corporation would operate at a loss for that long. Are the milk consumption habits different in the UK? Does the milk have to be fresh every morning and waiting on the doorstep for consumption right away? I don't think so. Supermarkets in the UK sell milk in various sized containers - just like in the USA. Is it just tradition? Is the UK more nostalgic about its industries than the US and reluctant not to let go of the familiar sound in the mornings?

Having lived in both places I tend to think the prolonged use of the milkman in the UK is based on nostalgia. Could they survive without door to door milk delivery - of course. In the USA, a service that you could live without (like this one) would either die or not be a success in the first place. The US consumer is driven by "what makes sense"...and the milkman just doesn't.

There is a lesson here for marketers. Customer are not only loyal to brands but also to traditions and choices. Think about the series "Cheers" - its always the same 6 people sitting at the bar. They could get the same beer elsewhere but they like the tradition in this distribution method. This is exactly the same for milk deliveries in the UK and just like Woody Harrelson behind the bar - in the UK they also have their favourite Milkmen (www.milkdeliveries.co.uk/doorstep) - see milkman of the year 2005.

Chris

More on celebrites as products

We at Felix think about products and how they go-to-market. We think about the processes that impact that. Sound boring?

We have long debated "what is the single most important product that the US produces?"...think about that. The key word is 'important', and you can define important in many ways. But when we boiled it down we decided that the most important product was CELEBRITIES - (http://felixnet.blogs.com/felix_is_a_forum_for_star/2006/01/celebrities_as_.html). That's not so boring.

We are activily building best practice processes for strategic marketing and if we could manage the life cylce of say "Ben Affleck" we get a big tick in our box.

Thats not to say we have not forgotten about other product types (Automobiles, software, milk, etc) but running a celebrity through our processes is more fun.

Anyone know any celebrities that we could run through the felix process - real time?

Introducing Felix's Thought of the Week

Coming tomorrow...

Each Friday we will post a obervation / opinion / question regarding the marketing mix.

Keith.

Celebrities as Products

What if Ben had used Felix Marketing Processes?

Consider the world of products. Some countries have comparative advantages with products that occur naturally. Some companies have competitive advantage through a patent that protects its products. Everything can be considered a product as not a lot is free these days.

Lets pick a product. The felix team has built key marketing processes to manage products across all industries so any product will do. Lets pick a product that is particularly crucial to the US economy. Celebrities. They are products that generate 100’s of millions each in their lifetime. Its is a very competitive industry where product aesthetics are highly desired. Some have longer product life cycles lives that others, why?

Now lets narrow down the product description. Lets call him Ben Aff. Here is a product that had the perfect launch gaining an Oscar for its first sale. The next few sales, although not as artistically recognized, turned out to be commercially rewarding. Then some bad product placement decisions led to a severe decline in the value of the product. This then allowed the competition to squeeze into future sales opportunities further compounding the downward spiral.

Now consider that situation if Ben had spoken to the boys at felix. It is essential that Ben monitors all of the functions of his product. Its is not just the aesthetics of his product but also the third party products he endorses (JLO). It is the Ads he appears in and the magazine articles that are written. Then there is the trends that will affect Ben and the competition who are hungry for his slice of the action. Felix processes have been designed to, at any point in time, position a product with the right functions to the right customers. In Ben’s case how could he have emulated the product life cycle of De Niro or Cruise? He should have talked to Felix.

Chris

Who is Felix?

Who is Felix?

Felix is not an “I”, it is “we” –

Felix is a group of marketing professionals from across different industries that have built this as an resource to share today’s leading marketing challenges, ideas and best practices. Our goal is to heighten awareness, and in some cases restore the accountability of marketing inside today’s organizations, both large and small. In order to discover and drive innovation, today’s marketing organizations must rise to a new set of challenges set forth by today’s senior executives. We believe there is a framework of knowledge and practice marketing executives can adopt in order to drive value and profitable innovation.

We welcome your ideas, thoughts, and experiences. After all, marketing is our passion – it’s what keeps us up each night!

To learn more, or to put you in direct communication with a member of Felix, you can contact us at teamfelix@gmail.com.