What Kind of Business Do You Want to Be?
The Business of Software: What Every Manager, Programmer, and
Entrepreneur Must Know to Thrive and Survive in Good Times and Bad
By Michael A. Cusumano
Free Press, March 2004
352 pages, $28
What do you for a living?
For anyone who has ever read Peter Drucker, the answer to that question is simple: "My number-one priority is to create a customer."
But how do you do it? While the natural tendency is to start talking about producing superior products or undertaking innovative marketing plans, Cusumano, a professor at Massachusetts Institute of Technology's Sloan School of Management, argues that you need to go back to the very beginning and think about how you want your company to do business. In other words, strategy is useless without the organization to execute it.
In what could have been called Technology Management 101, Cusumano argues that software companies—the focus here—can choose from three business models: They can be a products company (Microsoft); they can be a service company, providing consulting, systems integration and maintenance (Cap Gemini Ernst & Young); or they can be a hybrid, providing both products and services (IBM).
Nothing more basic than that, right? Then why do so many software companies get it wrong? One reason, Cusumano argues through case studies of companies ranging from AT&T to Toshiba, is that firms migrate, without sufficient thought, from one model to another in an attempt to capture more sales and earnings, all the while failing to staff up appropriately when their focus—or lack of it—changes. If you think this central thought is too basic, give yourself exactly 60 seconds and see how many failures you can name in the $600 billion software industry.
Cusumano's preference—like that of most people who help fund start-up software ventures—is the product approach: It's easier to manage and has the possibility of becoming much more profitable. He is quick to point out, however, that one business structure is not inherently better than another.
For example, product companies can make obscene sums of money if they come up with something that the world can't live without (Lotus 1-2-3, Microsoft Office). "Even Netscape, which had a limited life span as an independent firm, earned more than $10 billion for investors," Cusumano writes. But this same type of firm can see profits disappear quickly if its products are surpassed by another company, or if they become commodities.
When it comes to business models, the issues are twofold. First, you need to know what kind of company you want to be so that you can allocate resources effectively. Product companies need to organize in teams that focus on producing the best offering for a clearly defined market. Software service companies need to create relationships with their customers. As Cusumano writes, software service companies should "build technologies that look like products, or can be packaged in some way, but generally they cater to the needs of their individual clients." Second, you need to realize that it is all well and good to change your customer mix over time (if that's where the profits are), but your business model needs to change as well.
An examination of their basic business model is not something that software companies spend a lot of time on in their quest to become the next Microsoft or SAP. As Cusumano argues convincingly, they should.
Paul B. Brown is the author of numerous business books including Publishing Confidential: The Insider's Guide to What It Really Takes to Land a Nonfiction Book Deal, just published by Amacom.