Mobile Platforms Update: Android has the best long-term potential.

Update to my recent posting on Platform Products & Service: A Strategic Guide to launch, sustain and build enduring leadership.

Mountain View mobile app development platform company Appcelerator Inc. said 54 percent of the 2,733 developers it surveyed said Google’s (NASDAQ:GOOG)

  1. Android has the best long-term potential how to slim down fast.
  2. Android is favored for its OS capabilities and platform openness.

Appcelerator surveyed 2,733 of its 51,000+ developers from June 15-17, 2010.

The survey results are a vindication of my statement (earlier blog posting) that the Android platform will dominate the market for Smartphones and eventually take over everything from thin-clients, cloud computing, consumer electronics and ultra mobile internet devices. We will get the why in a follow up posting coming soon, stay tuned.


Download the full report on Mobile Developer Survey, June 2010 from Appcelerator

Platform Products & Services: A Strategic Guide to launch, sustain and build enduring leadership

 Article at a glance: A new breed of companies has emerged on the scène that only seem to get bigger and bigger with each passing day. The companies ranging from Cisco, Intel, Microsoft, Google, EBay, Facebook, Netflix, IBM, Alibaba to Apple have one thing in common their ability to develop platform based products and services. What gives platforms the edge and what strategies can one deploy to successfully develop platform based products or service.  ( Download PDF )

A follow on article will analyze how the Android Platform has emerged from nowhere to dominate the market for Smartphones and eventually take over everything from thin-clients, cloud computing, consumer electronics and ultra mobile internet devices market.

Introduction: Why Platforms?

The relentless pursuit of globalization with diminishing borders, instant dissemination of information, ubiquitous use of information technology and swift diffusion of ideas have heralded two important changes to the competitive dynamics of companies:

  1. Imitation of new products and services at an alarming rate.
  2. Traditional sources of competitive advantage no longer guarantee sustained leadership.

Given the state of hyper-competition it is no wonder that product lifecycles are shrinking and new competitors are emerging from nowhere to erode market share and with it revenue streams.

A company with a blockbuster product has to innovate at a rapid rate just to stay ahead of competition, a feat easier said than done. The safest bet it seemed was to add “Branding” or “Service” dimension to the product mix; intangibles that are harder to replicate. But even here the advent of ERP software, CRM systems, internet advertising and diffusion of best practices are bringing competitors and products closer than ever before.

On the other hand, a different breed of companies armed with platform based products/services seem invincible; immune from commoditization of products and services with a customer base that is deeply entrenched and group loyal.

Platforms: A platform by definition is a place (physical or virtual) where mutually interdependent players (single or multiple) conduct transactions, avail services, fulfill needs or realize an experience. An important distinction regarding platform centric products and services is their “self-reinforcing character” i.e. a core product or service whose value (benefits conferred) increases as more and more people adopt it.

A common characteristic of most platform based product or services is a participation fee and the recurring revenue streams (perpetual) generated by selling complementary products or services.

Examples: EBay, PayPal, DVD Players, Personal Computers, Google, Apple-iTunes, NTT-DOCOMO, Alibaba.


Platforms Everywhere:

Look around you and an increasing number of products sold today are networked in some way or the other. EBay connects buyers and sellers on a virtual platform. Gaming consoles connect players with video game publishers and other players. DVD players and Televisions systems now offer an endless number of choices to provision, access and personalize content. Apple connects content producers and application software providers with end users. Google connects internet users with web sites and web portals. MasterCard, Visa and PayPal connect buyers, sellers and intermediaries with each other. Intel and Microsoft connect PC users to application software providers and other PC users. The list goes on.

What’s common to all of these players is their ability to bring together interdependent players in a way that creates value for everyone involved.


1. A key distinction between platform based products/services and internet Ecommerce sites (Ex: Priceline, E*TRADE, Amazon) is the fact that the latter restrict two individuals belonging to the same group (buyers, sellers) to derive utility from each other. A second distinction comes from the utility gained by end-users which scales for platform products/service as the number of users “N” increases while that for an internet E-commerce site has a fixed upper bound.

2. Theoretically the maximum utility derived by an end-user from a platform based product/service is a function of N i.e. Utility = F (N * N-1), where “N” is the number of active users.

What makes Platforms based products and services different?

Platforms if done right confer on the pioneering firm the following advantages:

  • Lock-In due to Network Effects.
  • Monopoly / Winner-Take-All dynamics.
  • Perpetual Revenue streams.
  • Protection from imitators and price based competition.
  • Immunity against the need to innovate products faster.

Who can win the inherently risky and uncertain platform game?

Establishing a platform is an extremely risky venture where the outcome is uncertain. The odds are in favor of a firm that is:

  • Pioneer with first-mover advantage.
  • Revolutionary new idea (product / service)
  • Access to capital or with deep pockets.
  • Iron-clad patent protection.
  • Access to complementary assets.
  • Installed base and brand name.
  • Management skills to take decisive steps at each stage of the platform evolution.

Strategic Guide for developing Platform based products and services:

The strategic options available to firms considering a platform based approach to developing products and services are:

    1. Platform Strategy – Closed, Shared or Open
    2. Licensing Agreements
    3. Strategic Partnerships
    4. Subsidies
    5. In-House Complements
    6. Complement Providers
    7. Marketing Mix

1. Platform Strategy – Closed, Shared or Open:

The What: Platforms can be open, closed or shared.

  1. A platform is open if participation is unrestricted and free for one and all to join.
  2. A closed platform by definition is owned and controlled by one firm who decides among other things participation rights, platform features, partners and scope of complements.
  3. A shared platform is a joint effort by one or more firms bound together by common interests. Decisions on platform strategy are undertaken in the spirit of cooperation and commonly agreed upon goals.

The How: The decision to pursue Open, Closed or Shared platform strategy depends among other things on:

  • Barriers to Imitation
  • Possession of required complementary assets by sponsoring firm.
  • Installed base and leverage over industry participants.
  • Ability to fund big investments.
  • Availability of complementary providers with required expertise and know-how.
  • Coexistence of multiple platforms that can serve the same market profitably.
  • Cost of building the infrastructure and resources to deploy the platform.
  • Heterogeneous demands in customer needs and tastes that a single platform cannot serve.
  • Susceptibility of the platform to free rider problem.

The Risk: A closed platform allows a firm complete control and independence. However it requires a firm to have a breakthrough idea (product / service), ability to undertake large upfront investments in capital and resources and exercise leverage over other industry participants to build partnerships along the way. A shared platform in contrast allows firms to share the risk as well as rewards. Conflicts may arise with respect to platform roadmap, features, and resource allocation. In fast changing markets consensus among partners maybe slow to emerge jeopardizing the overall platform. An open platform is prone to free-rider problems, quality and control issues. Generating profits and revenue streams can be challenging with an open platform approach.

The When: A closed platform is the best way to enter the market initially when a firm wants to retain complete freedom over how the platform should evolve, who can participate, what features to offer and when. A closed platform may be a best option to recoup investments especially when a firm needs to commit large resources and undertake upfront investments. Once the platform acquires a large installed base opening the platform increases the overall value to all participants. A firm with a valuable intellectual property and fighting for acceptance within the industry may benefit from a shared approach by partnering with an industry heavyweight. When compatibility with an installed base is and winning acceptance from powerful complementors is critical a shared approach to platform development is the best way forward. An open platform serves mainly to dislodge deeply entrenched technology or in markets that are slow to take off and hence require government intervention.

2. Licensing (OEM) Agreements:

The Why: OEM Licensing can be a very potent weapon for the sponsoring firm to widen the installed base for a technology platform. An additional benefit of pursing this strategy is to co-opt competitors who posses resources to launch a superior competing technology. Licensing can be a very cost effective way of achieving wide scale market reach and penetration. Licensing also serves the purpose of ensuring that platform adopters don’t perceive the sponsoring firm as a monopolistic threat to their very existence. A firm may not have all the resources (tangible / intangible) necessary to serve all segments of the market.

The How: One way to go about achieving licensing deals is to establish a royalty fee based on unit shipments. For this to succeed the firm must have a unique offering protected by patents and perceived by others as synergistic to their core business. Another option is to actually pay adopters and complementors a portion of the revenues derived from transactions on the platform. The publicity that comes with a large number of OEM licensing deals sends a positive signal to would be adopters and complement providers of momentum behind a platform.

The Risk: A firm following this strategy should have patents that act as a barrier against imitation. Following this strategy is a sure shot recipe to value destruction in the long run if the technology behind the platform is the sole driver of revenue and value creation for the licensing firm. Competition will eventually drive down prices and erode market leadership unless the firm can innovate faster. The uncertainty surrounding platform adoption and market potential can pose challenges when structuring royalty payments.

The When: If the firm sponsoring the platform does not have a strong track record or a dominant position in the industry a licensing strategy makes perfect sense. Licensing is also important when a firm intends to establish its technology or platform as the dominant one in the industry. A firm must judiciously exercise this option at the very beginning so as to reap benefits later. However in doing so, the firm must have patents that prevent imitators for leapfrogging or have alternate sources of revenue that it can protect and sustain over a period of time.

3. Strategic Partnerships:

The Why: If launching a platform requires large upfront investments a partnership can minimize risks to both sides. A partnership is strategic and synergistic, when partners have a product portfolio and a revenue base that don’t overlap with minimal threat of encroachment. At the same time the partnership has to bring together complementary assets that each partner can leverage and deploy. Strategic partnerships can be employed as a preemptive move to diffuse powerful incumbents.

The How: One way to go about achieving strategic partnership is through cross-licensing of IP’s and patents and by establishing a royalty free licensing pool. Strategic partnerships can take the form of joint-venture, equity investments, platform co-development, joint marketing and/or sharing of complementary assets (technology, sales, distribution and manufacturing). When access to complementary assets is paramount revenue sharing can be a viable option.

The Risk: Strategic partnerships can be difficult to enforce, monitor and realize when firms have conflicting end goals. Power struggles and battles on platform evolution, roadmap and patent infringements can create challenges in developing a long term symbiotic relationship. Strategic partners may end up as formidable competitors later.

The When: If the firm sponsoring the platform cannot fund all the critical resources (capital, infrastructure and technology) and/or lacks complementary assets strategic partnerships are the way forward. Partnerships are a way for a firm to minimize risks and upfront investments in amassing all necessary complementary assets. Strategic partnerships can be very crucial when the success of a new platform depends on maintaining compatibility with an installed base or needs participation of powerful complement providers.

The main difference between Licensing Agreements and Strategic Partnership is, with the former you are proliferating the market with intent to preempt competition while the latter serves to address a shortcoming in your capability to create new markets through partnership.

4. Subsidies:

The Why: Buyers generally refrain from making upfront investments on products and services that are inherently risky or new. When the technology is still emerging it is unreasonable to expect platform users to pay a premium to adopt your product. One way to circumvent this problem is by way of subsidies that lower the price for would be adopters while recouping lost revenues through complementary services or products.

The How: To stir up a large installed base “Penetration Pricing” or “Freemium” can be the right strategy to deploy. In the extreme case where developing the platform incurs huge upfront costs (Ex: Gaming console, Personal computers, DVD players) an optimal strategy would be to subsidize platform users (higher price sensitivity segment) by pricing below cost while collecting a right-to-participate fee from platform providers and complement providers. A subsidy in the form of government rebate or tax breaks can also serve as a way to stimulate adoption but requires an open platform in most cases.

The Risk: Unless the platform sponsor (provider) has a superior technology, iron clad patent protection, deep pockets and an industry leader extracting subsidies from platform participants can be challenging. In the extreme case when complementors yield more power, the platform sponsor might be forced to settle for a smaller share of the revenues and focus on volume transactions. Care must be taken to prevent fee-riders or heavy users from abusing the platform.

The When: Subsidies are the right way to overcome resistance to adoption when the product (service) is revolutionary and requires platform participants and end users to make substantial investments or forgo sunk costs in legacy products. Subsidizes should only be offered when the platform sponsor has alternate means of recouping lost revenues in the form of platform participation or usage fee.

5. In-House Complements:

The Why: Platforms by definition suffer from a “Catch-22” or what is commonly referred to as “Chicken-and-Egg” problem. Potential platform participants (providers / complementors) will hesitate making a commitment until they are sure the investment will pay off. Likewise platform end-users will prefer to wait and watch before diving in.

In the absence of a large established user base attracting complementors whose participation is a must for end users to gain utility from the platform poses a significant challenge. Developing in-house complements become a necessity for the platform to have a life. In-house complements send a strong signal to would be platform participants that the sponsoring firm is committed behind the platform.

The How: To kick starting the self reinforcing positive feedback, the platform sponsor should be prepared to develop complements in-house at least during the initial phase. Development of in-house complements should commence early on so that the platform can be launched with complements. Bundling complements with the platform can be one approach to ensuring that the cost of developing In-House complements is recouped. In-house complements must start strong and build a stellar reputation and brand name where possible.

The Risk: Developing in house complements along with sponsoring a platform requires large investments and commitment from a firm’s management. A risk-averse firm and its manager will find it difficult to secure funding and resources when returns fail to cover the cost of capital. The problem is acute in publicly traded firms where management must withstand the scrutiny of share holders and investors alike.

The When: Developing in-house complements becomes a necessity when a platform is revolutionary, evolving and incurs irreversible sunk costs in resource and capital from external platform providers and complementors. Platforms with pioneering technology that require hand holding and a longer learning curve may also prompt a firm to develop complements in-house initially. Developing in-house complements also ensures that only high quality products reach the end users.

6. Platform Complementors:

The Why: Complements enhance the value of a product by conferring additional benefits and enriching the overall experience for the end user. Complements allow a firm to establish a virtual R&D factory without the need to fund the projects. A complement may be something tangible: add-on product or an intangible: service.

The How: Developing complements requires an ability to develop relationships with multiple players and participants from all sections of the industry. It requires foresight and an uncanny ability to lead, to seek, to nurture and to develop win-win relationships. The sponsoring firm might have to fund external complementors. It must facilitate complementors to develop a viable business model that can generate revenues from the platform. An independent business unit armed with personnel, money, power and authority along with the right incentives to act in the best interest of complement providers will ensure a better chance of success. Development of technology standards that facilitate easy integration and programs that allow advanced access to technology must be instituted. The platform sponsor can consider making minority investments, taking controlling stake or signing an exclusive contract with promising complement providers.

The Risk: Complement providers may not invest the resources, talent or time to develop value added services or products for the platform. Products may suffer from quality issues or fail to meet the needs of users. If left unmonitored an influx of me-too complementors could undermine the profitability of the entire ecosystem by driving down prices through competition and imitation.

The When: The firm’s business model should clearly define its scope with respect to the platform and those of its complementors. Building trust and partnership takes time and should be prioritized constantly. Evaluation of partners that augment and enhance the platform’s overall utility to the end-user must be accorded importance at each stage of the platform’s development. In the early stages of the platform evolution complement providers that the ability to attract new users should be given priority. In the later stages complement providers that enhance platform stickiness must be sought out. As the platform evolves complement providers that bring diverse products and services should be added to the platform mix.

7. Marketing Mix:

The Why: Effective use of the marketing mix – Product, Price, Promotion and Place can make all the difference when launching a new platform. A platform that fails to solve an unmet customer need with inadequate promotion and distribution reach may fail to attract a large user base. Pricing is all the more important when establishing a new standard or platform due to the risk-averse nature of most buyers.

The How: The product should offer a value proposition unmatched in the marketplace. Targeting lead adopters and securing endorsements from key opinion leaders can be extremely beneficial. A myopic pricing policy that aims to satisfy P&L statements will only deflate adoption rates. To stir adoption and establish a wide installed base the firm must chose penetration pricing; forgoing short-term profits over long-term benefits. The firm may have to blanket the market with a full product line to meets heterogeneous segments of the market. An expansive distribution reach must follow to ensure product availability and penetration within the market. The importance of effective advertising to ease concerns regarding ease of use, compatibility, reliability and value proposition should not be overlooked.

The Risk: The platform may fail to reach critical mass forcing the firm to write down millions of dollars in marketing and R&D investments. The flip side, wide spread adoption and subsequent demand may find the firm scrambling to meet excess capacity or fulfill user requirements without scaling infrastructure. Penetration pricing requires deep pockets and the ability to fund operations in the absence of credible revenue base.

The When: The firm should spend heavily on advertisements, joint promotions and media campaigns during launch of the platform. Price aggressively early on even if it means selling at or below cost. Distribution coverage should mirror the adoption profile targeting lead adopters initially before moving to the mass market. Product and service mix should emphasize the composition of the user base with an aim to serve all needs arising on the platform check here.


I am deeply indebted to Professor Hemant Bhargava and Professor Greta Hsu at the UC Davis Graduate School of Management and Professor Siobhan O’Mahony now with Boston University School of Management for providing me a foundation and inspiring me to pursue my passion. Thank You !

2014: USA EBook Reader Sales: 75 Million Units, Penetration Rate: 22%

Cumulative sales of EBook readers in the USA will reach close to 75 million units by 2014 with a penetration rate of around 22% marking an inflection point for the US Book publishing industry. My preliminary projections on EBook Reader sales in the USA are based on studying similar adoption patterns.


The adoption of DVD Players and Digital Cameras, both of which exhibit similar dynamics, serve as a basis for predicting adoption and diffusion of EBook readers:

  1. Digital Cameras replaced Film-based photography overcoming a widely used and deeply entrenched user base. The adoption of Digital-Photo technology resulted in  significant changes to the overall ecosystem. EBook adoption will also witness similar disruption and changes to value-chain. 
  2. DVD Players replaced an incumbent technology – VCR’s and associated video library; the sunk costs weighed heavily in the minds of potential adopters. EBook adopters will also confront similar choices.
  3. Sales of DVD Players is closely tied to the number of DVD software titles available. The DVD Tie-Ratio at launch in 1997 was 18 climbing to a peak of 56 in 2008.EBook reader sales and adoption will also be tied to the number of EBook titles available.   

Note: Tie-Ratio is defined as the ratio of DVD Software Titles sales to the number of DVD players sold. A high availability of DVD titles stimulates more demand for DVD players.

Applying the Bass diffusion model and using regression analysis of historical sales data (1997 –2008) for DVD Players and Digital Cameras we obtain the following technology diffusion parameters (Table below).


Digital Camera

DVD Player

EBook Reader

Coefficient of Innovation





Coefficient of Imitation





Inflection Point (Yrs)





* Note: EBook adoption parameters are predicted.

Adoption of DVD Players was faster compared to the Digital Cameras. This can be attributed to the fact that DVD’s were an incremental innovation to an existing but familiar usage of video recording technology prevalent in VCR’s. In contrast Digital Cameras were a radical departure from existing film technology with changes in learning, usage and ecosystem requirements. As a consequence Digital Cameras adoption was slower compared to DVD Players.

The adoption of EBook Readers should follow a similar pattern, somewhere between the two extremes,reaching an inflection point by 2014, 7-years from launch. Although the technology behind EBooks has existed for years in the form of computers, laptops and net-books the changes are mainly behavioral – in the adopters reading habits.

EBook adoption may accelerate depending on the use of marketing mix elements, availability of EBook titles and how competition unfolds in the coming years all of which can significantly alter the adoption process.

Appendix: Sales Forecast of DVD Players and Digital Cameras based on Bass Diffusion Model.

1. USA – DVD Players Sales (Forecasted vs. Actual )


2. USA – Digital Camera Sales (Forecasted vs quick weight loss diet plan. Actual )



  1. Digital Camera Sales (1997–2008)- PMA Marketing Research
  2. DVD Players and DVD Software Title Sales (1997-2009) – DEG, Digital Entertainment Group
  3. SPSS for statistical analysis.

New Product Design– A Toolkit for Identifying Whitespaces

When developing new products it is the job of a Product Manager(PM) to use his judgment based on inputs from market research, competitive intelligence and development teams to come with a product-mix that offers customers a compelling reason to buy.


Any offering by its very existence forms a unique triangular dependence with three major constituents:OfferingTriangle

  1. Customers
  2. Substitutes (Competition)
  3. Firm’s Offering

When conceiving new products the triangular relationship is of paramount importance. A new offering can either be similar or distinct from what’s available in the marketplace.

A savvy PM will instantly think of “Differentiating” his offering in order to attract buyers and gain a footing in the marketplace.

Why Differentiate an offering in the first place ?

Differentiation makes a product/service less sensitive to price based competition by limiting the buyers choice set on substitutes. 

Differentiation is a strategic weapon whereas Pricing can be both strategic and tactical. 

Is differentiation always good ?

Differentiation is a double edge sword in that while it allows a firm to generate higher margins it has the effect of restricting sales volume due to heterogeneity in customer traits. 

In many industries the breakdown on Customer Segments and Market Size based on Price and Quality dimensions shows remarkable similarity (Table below).







Premium / Luxury
( Market Size: 15% -20% ) 

Value / Mass Market
( Market Size: 50% -60% ) 



Arbitrage / Opportunistic
( Market Size: 5% -10% ) 

Bottom Market
( Market Size: 10% -15% ) 

Source: Creating Strategic Leverage, Milind M. Lele

Assuming you have factored all of this in, and convinced that differentiation is the way to go then the question boils down to How do you differentiate ?

Diving into Differentiation:

Broadly speaking, a Firm and its Product Manager have two basic means for differentiating a product based on either “Tangible OR “In-Tangible attributes:



1. Features

1. Aura

2. Aesthetics

2. Service & Support

 A. Tangible Attributes

1. Features:

Are the primary vehicle used to deliver a benefit. Features are what a product manager and all constituents internal to a company focus on. For the end user or paying customer features matter very little if they don’t confer some benefit.

This is where most Product Managers commit fallacies that result from:

(a) Scoping products with rich feature sets that drive up cost without paying attention to what benefits they deliver or the benefits that customer care about.

(b) Casting products without anticipating current/future needs or misjudging close competitors and substitutes as the only viable choice set for consideration.

(c) Failure to position and map the product features into benefits for customers and stakeholders alike during marketing and sales pitch. 

2. Aesthetics:

Aesthetics govern the look and feel for a product or service. Its sole purpose sometimes is to engage customers visually to lure them and on rare occasions invoke feelings of pleasure each time the product is used.

Are Features and Aesthetic accorded equal weight by customers ?

Not always, for some product classes customers exhibit asymmetry when weighing between aesthetics and features. Most products sold to B2C customers fall in this category.

Example: Desktop-PC’s vs. Laptop’s

All else being equal a desktop computer, usually tucked under the table, might still attract buyers even when it has inferior aesthetics. On the other hand a laptop needs to be both feature rich and visually appealing for it to sell.

 B. In-Tangible Attributes

 1. Aura:

Aura defines the cognitive feelings and responses that a product or service invokes in the customer’s mind read this article. Branding and Advertisements play an important role in creating, communicating and conditioning the attitudes and behaviors on both the demand-side and supply side of the market place.

Aura confers status, establishes identity and reassures customers of their choices.

2. Service and Support:

Not all products carry service and support, in fact most buyers prefer not to deal with it. But invariably anything that is sold needs some amount of support in facilitating its procurement, installation, usage and consumption.

A pure Service Good on the other hand has no physical product that is sold but rather solves a problem or eliminates hurdles for the end customers. Services also include ecosystems that differentiate and augment the core offerings.

7 Rules of Product Acceptability:

A new product although differentiated may still fail to gain market acceptance   if the following rules of product acceptability are overlooked.

  1. Functional Performance
  2. Acquisition Cost
  3. Ease-of-Use
  4. Operating Cost
  5. Reliability
  6. Serviceability
  7. Compatibility

Identifying White Spaces: Tangible or In-Tangible Dimension

Now that we have explored the four possible dimensions to differentiate an offering in the marketplace, lets look at how to indentify whitespaces and to go after new opportunities.

When indentifying new market opportunities a strategist should neither exclude nor focus on solely one dimension. The only thing that should matter is whether there are enough customers who given the varied choices (offerings) before them prefer one combination over others.

Matrix of Whitespaces – New Opportunities


The number of possible combinations using different mix of tangible (product features ) and in-tangible (service) attributes yields a matrix of 16 different cells each representing a unique offering in the market place. However not all offerings are relevant to all markets. Each offering in the matrix above shares a very unique and separate triangular relationship with its customers and substitutes.

The matrix offers firms and would be entrepreneurs a blue print to evaluate market opportunities and to formulate new product strategy. Implicit in the opportunity matrix above is the assumption that the returns exceed the cost of capital.

Whitespaces in EBook Reader Market


EBooks and Future of the US Book Publishing Industry (Part-I)

Part-I on this series will analyze the current state of the US book publishing industry -the key players, the value chain and profit distribution between the various players and rules that define competition within this industry.

Part-II will address the key challenges and strategic choices confronting both established and new entrants as EBook adoption accelerates. Will the EBook value chain differ significantly, how will incumbents react and who will come to dominate the landscape. Will EBooks lead to a new winner like Apple in digital music. If not why not.

US Book Publishing Industry Dynamics:

Book Publishing is essentially a “Hit-or-Miss” game of chance.Much like the movie and music industry the following rules apply:

  1. Sunk Cost Rule – All of the cost of putting together and publishing a book is fixed and up-front. Irrespective of how the book is received the costs cannot be recovered.

  2. Hit-Books Rule – There is no proven formula that will guarantee that a book will be a runaway success before its publication. Sales from a few “Hit Books” cover up for lost revenues from other not so successful books. The ratio of “Hit-Books” to “Failures” varies between 3% to 8%.

  3. Franchise and Brand Name Rule – A few well known authors enjoy cult like following based on their previous works or series of books. The lure of astronomical sales leads to a frenzy among publishers to find and sign up big name authors. 

  4. Deep Pockets Rule – Only those publishers who can sustain multiple failures for the chance of few elusive hit stand to survive. The result consolidation, enormous bargaining power and leverage enjoyed by book publishers.

  5. Retail Network Rule – Selling books requires a deep network of established relationships with book sellers and big retailers. Retail shelf space is highly contested for. Retailers have gained enormous clout from consolidation in the recent years.

  6. Book Returns Rule – The practice of allowing book sellers to return unsold inventory first instituted during the Great Depression continues till today. Book returns run as high as 20% for publishers.

Stakeholders in the US Book publishing industry:

  1. Book Publishers
  2. Book Authors and Book Agents
  3. Book Sellers, Retailers and Distributors
  4. Buyers( Consumers, Institutional Buyers and Libraries )
  5. Service Providers ( Printing, Marketing, Logistics )
The US Book Publishing Industry – Value Chain

Across the value chain, US Book Publishers and Retailers enjoy significant clout and power base when it comes to negotiating prices, striking deals, managing access to resources, cultivating readers and promoting self interest. 


Distribution of Profits across the US Value Chain:

The distribution and allocation of profits (Print Books) across the US Book industry is skewed in favor of those intermediaries that can offer customer something they value, influence sales and offer value added services.

Pre-Production costs include the costs of writing, editing and reviewing manuscripts. The printing costs include the cost of physical paper, artwork and binding the book. This cost varies depending on the book size, number of pages, and illustrations used.

The publisher’s overhead includes the cost of maintaining a staff of editors, proofreaders, book designers, publicists, sales representatives and so on.

Marketing and promoting the book is another expense that include printing catalogs, media and print campaigns, sending out review copies to critics, arranging a promotion tour with the author and trade promotions for retailers all add up the cost of bringing a book to the market. 

For retailers there is additional cost of operating and staffing the store, allocating shelf space, stocking the book, maintaining inventory and servicing customers. To a certain extent they can exploit economies of scope in buying and selling books.


* Assumes a hardcover book with a retail selling price of $29.95

The two powerful groups- “Book Publishers and Book Retailers” who stand to lose the most, with any disruption in the status quo, will explore all possible avenues to retain control over the emerging EBook ecosystem.

US Book Sales Market Size:

Forrester Research puts the overall size of the US book market at around $25 Billion. Books Sales between 2002 and 2008 have varied from a low of $22 Billion to a high of $24 Billions at a compounded annual growth rate of around 1.6% in the same period.

Over time a good chunk of that is going to migrate towards EBooks. 

Total book sales fell 2.8% in 2008, to $24.2 billion, according to preliminary estimates released by the Association of American Publishers.


The top categories which dominate book sales today are:

  1. Adults and Children’s Books (33%)
  2. Elhi-Elementary, High School Books (25%)
  3. Professional Books (14.25%)
  4. Higher Education – Post Secondary (15.57%)

The question confronting Book Publishers- Which category renders itself the most vulnerable from the threat imposed by EBooks.

Book Buyers: Who are they ?

According to BISG, people above the age of 50 buy more than half of all books. The older demographics of devote book readers have disposable incomes and time to read (stable customer base).

The demographic breakdown of book buyers based on 2008 population estimates puts the total market size in this segment to around 110 Million. As a customer base this segment is very important and cannot be ignored.


The other major group comprises of school and college students: children, teens and younger adults. As a customer base they have the shortest lifespan correlating with the stage in their lifecycle. A few perhaps could evolve as avid readers later in their adult life.


Elhi Enrollment
   %    Growth

Postsecondary Enrollment

% Growth





















In 2008 revenues from book sales to Elhi and Postsecondary college students amounted to around $9.8 Billion. On an average a college students spends close to $1000 per year on textbooks. 

The challenge than for Book Publishers grappling with strategic initiatives on how to face the threat imposed by EBook adoption and penetration boils down to the following: 

You have two important customer segments:
  1. People above the age of 50, your most valuable customer base is not going to change their years of reading habits. A few perhaps YES but the vast majority will continue to consume books the old fashioned way – print bound. How to position EBooks within this segment.

  2. School and College Students, you can change and influence their book reading behavior during the formative years. The question arises who will invest and how much to promote EBooks in a big way.  Access to this segment is controlled via powerful decision makers – departments heads of schools, colleges and universities, state and federal education boards.


  1. Association of American Publishers
  2. National Association of College Stores
  3. US Census Data
  4. Book Publishers websites and SEC filings.
  5. PWC: Global Entertainment and Media Outlook: 2008–2012

Facebook, $1 Billion Company ?

Advertisers annually spend about $265 billion across 11 different types of media to reach U.S. consumers.

Facebook, has established itself as a social networking site to reckon with and potentially see revenues of $1 Billion by 2015. The audacious goal seems very much possible in light of the following trends:

  1. Contraction in offline Ad spending as advertisers migrates to less expensive media with better ROI potential. Online advertisement is the best obvious choice.
  2. The advent of DVR has deprived television advertisers of a valuable stream to reach a large user base.
  3. Declining Newspaper subscriptions (7%) will force advertisers to reallocate their budgets and find new means to deliver national and local advertisements. Historically newspapers have accounted for a 2.5 x multiple for each AD impression served per household.
  4. Paid Search Advertisements while very effective for National Brand advertisers has failed to generate the same kind of impact for local and small businesses.

Social Networking sites come closest to replicating the 2.5 x multiple for each AD impression served because a typical user is connected to 100’s of other users, friends and family. Facebook definitely has the potential to address all or some of the above challenges and offers advertisers a unique value proposition.

Revenue projections assuming a modest 5% market share for Facebook, of the overall graphical advertising market, put revenues from advertising alone to about $800 Million by 2015.

Local Online Advertisements






Annual Local Online Ad Impressions Served (Billions)2






Facebook: Share of Local Online Ad Impressions






Facebook Local AD Impression Multiple






Cost per thousand impressions (CPM)





$7 click here now.20

Annual Local AD Revenues






National Online Annual Advertisements






National Online Ad Impressions Served (Billions)1






Facebook: Share of Online Ad Impressions






Facebook AD Impression Multiple






Cost per thousand impressions (CPM)






Annual National AD Revenues






Total Annual AD Revenues







  1. J.P Morgan Global Equity Research, Jan 2009
  2. Economics of Search Marketing, Borrell Associates, June 2009
  3. IAB Internet Advertising Revenue Report, 2008

Buyers & Purchase Motivation

Summary on the five different purchase motivations encountered by shoppers:

  1. An economic motivation, where the main goal is to save money; ( Bargain Hunters, Ex: Coupon Shoppers )
  2. A hedonistic motivation, where the aim is to feel pleasure; ( Pleasure Seekers, Ex: Mall Shoppers )
  3. A routine-loyal, or risk-avoiding, one, where the goal is to reduce the risk of being disappointed by a purchase by remaining loyal to a favorite brand or store; ( Risk Averse, Ex: Changing toothpaste)
  4. A relational one, where buyers seek to establish a relationship with a store or its staff and be recognized as a privileged client; ( Social Class, Ex: iPhone buyers )
  5. A functional one, where the aim is to decrease the time and effort devoted to making purchases. (Search Costs, Ex: High Income / Senior Grocery Shoppers)

The challenge then becomes how to identify your buyers and classify them into one of the above categories. Some of the approaches involve:

  • Club Card membership to observe and monitor purchase behavior.
  • Cookies that track user browsing behavior
  • Utilizing clues from consumer’s behavior to build a psycho-graphic profile.
  • Direct Email Campaigns that tout coupons.
  • Analyzing buyer traits based on life-cycle stage. i.e. Younger Adults prefer brand name fashion designers
  • Social Networking sites such as Facebook can be a valuable tool in uncovering buyer traits.


  1. MIT Sloan Review: Rewards that Reward
  2. Consumer Behavior: A Strategic Approach, Henry Assael

Vizio LCD-TV : North American Retail Channel Strategy

When Digital-TV entered mainstream North American market the price point for a 40-in plasma and LCD-TV system averaged around $2000 – $2500 (2003/2004). With an average CRT TV selling well under $500 the market for HDTV was limited to early adopters and lead users with significant disposable incomes.

Given the dynamics in consumer behavior Vizio’s target market segment for its initial launch was limited to the 35+ age group, who are affluent, college educated with significant disposable income. LCD TV’s sold by Vizio weren’t particularly known for superior image quality or build quality, but rather for affordability and value for the money.

The target market segment for its initial launch was limited to the 35+ age group, who are affluent, college educated with significant disposable income. LCD TV’s sold by weren’t particularly known for superior image quality or build quality, but rather for affordability and value for the money.

How could a relatively new entrant such as Vizio establish a presence and reach its intended target customer base?

This analysis looks at why Vizio, the LCD-TV maker choose Costco as their retail channel of choice at entry. What were the strategic and competitive implications and the overall dynamics within the industry that a relatively new entrant such as Vizio faced when entering the highly competitive LCD TV market dominated by big global players. How did Vizio use their success from the warehouse club retail channel to finally gain entry into mass-market retailers?

Incumbents and Barriers to Market Entry

The market for consumer electronics and television systems has traditionally been dominated by well established players such as Sony, Panasonic, Philips, Toshiba, Samsung and LG among others. A comparative analysis on their strengths is captured in detail below.

Competitive Leverage





Access to Retail Channels


Established Relationship

Established Relationship

Established Relationship

Supplier Strength & Relationship

Dependent on outside suppliers for LCD panel.

May find itself at the mercy of component suppliers during high demand.

Relies extensively on Contract Manufactures

Manufactures Panels.

Can leverage it position in market to squeeze component suppliers.

Combination of Contract Manufactures and In-House Production.

Manufactures Panels

Can leverage it position in market to squeeze component suppliers.

Combination of Contract Manufactures and In-House Production.

Manufacturers Panels

Can leverage it position in market to squeeze component suppliers.

Combination of Contract Manufactures and In-House Production

Access to Technology

( Software, Hardware, & Manufacturers )

Follow industry Leaders.

In a position to dictate and control technology development and licensing.

Can dictate and control technology development and licensing.

Follow Industry Leaders

Economies of Scale

Limited in its ability to realize economies of scale.

Economies of scale dependent on LCD units/ panels shipped because of HIGH CAPEX expenditures associated with FABS.

Economies of scale dependent on LCD units/ panels shipped because of HIGH CAPEX expenditures associated with FABS

Economies of scale dependent on LCD units/ panels shipped because of HIGH CAPEX expenditures associated with FABS

Economies of Scope

Relatively unknown brand with limited product offering.

Brand name can be leveraged to realize economies of scope in marketing and product adoption.

Brand name can be leveraged to realize economies of scope in marketing and product adoption.

Brand name can be leveraged to realize economies of scope in marketing and product adoption.


Has to undercut competitors to gain market share.

Well known brand can command a Very HIGH premium

Well known brand can command a HIGH premium

Well known brand can command a premium

Being a new and unknown entrant in a highly competitive market was one of the biggest challenges for VIZIO. To get an edge in the market VIZIO would need to differentiate based on price. In order to gain access to the customers using well established retail channels Vizio would have to strike retailer partnerships and provide better incentives than incumbent’s margins, sales commission and marketing promotions.

Being a new and unknown entrant in a highly competitive market was one of the biggest challenges for VIZIO. To get an edge in the market VIZIO would need to differentiate based on price. In order to gain access to the customers using well established retail channels would have to strike retailer partnerships and provide better incentives than incumbent’s margins, sales commission and marketing promotions.

Consumer Segmentation

The ideal customer segment that VIZIO went after was “Imitators” a self-informed segment with awareness about LCD-TV product and the technology. By going after “Imitators”, VIZIO won’t have to incur the costs of promoting the product to the innovator segment and ride on the marketing awareness generated by established incumbents.

North American Retail Channels and Power
The retail channel in North America is dominated by four major categories of retailers each with significant clout, market reach and market share:

  1. Big-Box Retailers : Wal-Mart, Target, Sears and the likes
  2. Specialty Electronics Retailers: Best Buy, Circuit-City, RadioShack and the likes
  3. Warehouse Club Retailers: Costco, Sam’s Club, BJ’s and others
  4. E-Retailers: Amazon, Crutchfield and Dell among others

Online retailers were not really an option for Vizio since the average consumer spent less than $300 on a consumer electronics purchase.


Retail Channel Costs and Margins

The various retail channels pose different challenges, margins and capability for Vizio in reaching its prospective end customer. Table below summarizes the key challenges with various retail channels.

Channel Characteristics

Warehouse Club Retailers

Traditional Retailers

Specialty Electronic Retailers

Marketing & Promotion Costs for Manufacturer




Sales Commission


Low – Medium

Medium – High

Revenue / Profits Streams

Mark Ups

Markups, Volume Discount, Double Marginalization, Sales Promotions

Markups, Volume Discount, Double Marginalization, Sales Promotions

Influencing Buyer Purchase Decision


Manufacturer Incentives and Commissions

Manufacturer Incentives and Commissions

Profit Margins

10 – 15%

20 – 30%

25 – 40%

Distribution & Logistics

Managed by Retailer or 3rd Party Distributor

3rd Party Distributor

3rd Party Distributor

Table 1: USA Retail Channel Characteristics and Costs

Warehouse VS. Retailer Margins

Keeping prices low was one of the key differentiating and positioning factors for VIZIO. Catering to high-end retailers meant that there could be additional marginal costs added by the retailer, which would hike up the price. The warehouse clubs do not double marginalize the products they sell since 70% of the revenues come from membership fees. By selling products only at warehouse club retailers, Vizio would avoid double marginalization and ensure a lower retail price for the consumer.

Warehouse Club Retailers and Market Reach

Some of the major players in the Warehouse Club Retailer space were BJ’s warehouse, Sam’s Club and Costco. The average stock keeping unit for each of these warehouses and the number of stores nationwide is shown below. Given the reach of this warehouse retail network to the consumer public, and its low margin cost model, VIZIO used these outlets as the channel for its products.

The three major warehouse club retailers are located throughout the USA, and offer full geographical coverage across the country. Therefore, their reach to the broad consumer base is not diminished. The break-up of VIZIO’s average sales percentage at each of these warehouse stores is shown in the chart above. As we can see, a large percentage of the sales will occur at Costco.

Analyzing Competition at Traditional Retail Channels using Game Theory

An intuition for incumbent reaction across traditional and specialty electronic retail channels can be built using the Game Theory. Based on anticipated response the incumbents will fight aggressively against Vizio’s entry. A protracted pricing war would seriously undermine Vizio given its limited financial resources to fight incumbent promotions, volumes discounts and sales commissions.

Unit Sales (Traditional Retailers) (Payoff is # Units Sold)

Sony / Samsung / Philips / LG





30%, 70% (M+)

40%, 60% (M)


20%, 80% (M)

25%, 75% (M)

If both incumbents and Vizio “Fight” there will be price erosion leading to an increased market size M+ (# units sold). All participants will benefit with established players such as Sony, Samsung and Philips gaining more than Vizio on account of their brand image and prevalence in the consumer electronics market.

If the incumbents and Vizio both accommodate, then there is no price erosion and market is expected to be M (# units sold).The market (M) will probably be split among all players and whoever accommodates is to expected loose share of market share to the other.

Analyzing Competition at Warehouse Club Retailers using Game Theory

An intuition for incumbent reaction across warehouse club retail channels can be analyzed using the Game Theory. Based on the anticipated response, the incumbents will ‘Accommodate’ & Vizio will ‘Fight’

One reason for this behavior is that the Federal Robinson-Patman Act that prohibits manufacturers and suppliers from providing price discounts and other forms of preferential treatment to some buyers and not to others. Existing contracts with traditional retailers will prohibit incumbents from matching Vizio’s low prices and margins offered to warehouse club retailers such as Costco.

Unit Sales (Warehouse Club Retailers)(Payoff is # Units Sold)

Sony / Samsung / Philips / LG





30%, 70% (M+)

40%, 60% (M)


20%, 80% (M)

25%, 75% (M)

Vizio – Costco Retail Partnership: A Win-Win

Vizio’s strategy to enter the retail channel with Costco to launch its range of LCD-TV’s was the right choice given the enormous power that USA retailers enjoy. The low-price strategy and lack of brand name were factors that played in favor of Costco.

At Costco, Vizio relied extensively on prospective buyers to pick its LCD-TV’s without any assistance from retail floor personnel in influencing and steering the customers during the sales process. The strategy made sense given Vizio low brand awareness. At traditional retailers Vizio would stand no chance competing against big brand names with marketing muscle and promotions aimed at influencing consumer buying process.

A typical USA Warehouse Club Shoppers shares the following traits:

  • 35+ yrs,
  • Affluent, with disposable income

Costco also requires that a manufacturer sell directly to them. This works in favor of Vizio and eliminates costs and markups associated with middle distributors.

Costco’s no frills based selling with minimal marketing and advertisement expenditures is synergistic with Vizio’s low cost approach to selling. Vizio as a new entrant does not have the advertisement and marketing budgets to take on established stalwarts such as Sony, Samsung, Sharp and others.

Given Vizio’s limited financial resources and low brand awareness, Costco was the ideal choice to enter the highly competitive LCD TV market for the following reasons:

  1. Costco’s profits margins and hence markup on products sold at its retail locations average between 10-15% compared to other retail channels. Allows Vizio to sell products at a lower cost its key differentiator against major brand names.
  2. Eliminates additional cost associated with maintaining a 3rd party distributor as Costco manages all its inventory and logistics in-house. Avoids channel conflicts associated with double marginalization as Costco negotiates a standard markup irrespective of the number of units sold or incentives offered.
  3. Vizio does not need to spend marketing dollars on sales commission or to run major promotions and advertisement campaigns. Costco runs a lean-mean marketing campaign with limited promotions advertised only to members.

Vizio success can be attributed to its unique channel strategy. Its warehouse club channel focus and lack of channel conflicts enabled the company to achieve disruptive price points-helping to fuel the rapid rise of the warehouse club channel in the US TV market and causing its shipments to surge.

Expanding Retail presence

Finally, VIZIO management knew that they did need to make a concerted effort to move outside the warehouse club channel and did so successfully at Circuit City, Sears and Wal-Mart. The early success with Costco and Sam’s club that enabled Vizio to reach #3 ranking by 2006 allowed it to negotiate better terms and gains additional retail presence.

Vizio was able to maintain the Club channel price points in most cases and benefited nicely from Circuit City and Wal-Mart ramping in Q2 2007, which resulted in significant growth and the #1 ranking in the North American flat panel TV market.



This analysis would not have been completed without the helpful and critical inputs provided by Archana Arunkumar, Anoop Ramgiri and Venkata Duvvuri. The informal discussions with Costco retail store employees have also contributed immensely in understanding the business of warehouse club retailers.


  1. DisplaySearch LCD-TV Market Research data
  2. Samsung LCD-TV projections 2005 – 2011
  3. US Census Bureau Annual Benchmark Report for Retail Trade, 2006
  4. NPD Group
  5. ABI Shopper Poll, Nov 2005
  6. Costco : Telsey Advisory Group Report
  7. Vizio Company Press Releases.

Brocade & Foundry Networks: Behind the merger

The world is converging to Ethernet and IP. What happened to Telecom is now happening in the Data Center. Parallel infrastructures are costly to support, implement, operate, and maintain. Why have separate infrastructures for Storage (Fibre Channel) when you have an existing Ethernet infrastructure completely capable of supporting Storage networking?

Before Convergence                                                          After Convergence


While Cisco already has a Fibre Channel over Ethernet (FCoE) switch shipping today, the Cisco Nexus 5000, Brocade has nothing to offer and needs to play catch up. It takes tremendous amount of investment and R&D to bring an FCoE capable switch to the market.

The FCoE market opportunities for Brocade will be large and of high strategic importance. Early dominance of market share could expand to a long-term leadership position in the evolving SAN market.  This is possible because FCoE is clearly a disruptive technology, one that could change the underlying SAN infrastructure, business models, and, as a consequence, major players servicing and driving the industry.


Brocade is the leader in data storage networking in data centers with significant technology, product, distribution and installed base advantages.  Foundry is the leading innovator in data networking for enterprises and service providers, including performance leadership in the emerging 10GigE market.  With Brocade’s strengths in Fibre Channel technology and data storage and Foundry’s strengths in networking and Ethernet technology, Foundry is complementary to Brocade, not redundant. 

By combining, they will be a bigger, stronger company with additional diversification, technical IP, increased R&D and economies of scale.  They will be able to provide leadership across the breadth of the networking industry and their combined strengths will play to where the market is heading – highest performance and reliability, new and converged technologies.

Brocade and Foundry Networks: Product Synergies

The Brocade, Foundry Networks merger will allow the two companies to develop a Data Center switch capable of meeting the needs of a converged network and tackling Cisco’s emerging threat in the data center space.

Product Synergies

Table 1: Brocade and Foundry Networks Product Synergies

Brocade’s storage area network expertise can be leveraged against Ethernet based networking expertise from Foundry Networks to develop the next generation Data Center switch capable of competing against Cisco Systems.

Brocade and Foundry Networks: Channel Synergies

Brocade has fared quite well internationally while Foundry’s success has come from domestic sales, such as those to the federal government. Brocade has relied mainly on OEMs to move its gear while Foundry’s focus has been on direct sales and channel partners. From the marriage then comes a more rounded supplier.

Brocade and Foundry Networks: Cost Synergies

Brocade’s investment in R&D as percentage of sales has been declining year over year although its spending is still higher than the industry averages.  At the same time Brocade has seen rather steep erosion on its gross margins as a percentage of sales. Brocade will face challenges going forward as reduced R&D spending and declines in gross margins will seriously undermine its position to meet growth with its current portfolio of products. 


Figure 1: Brocade Spending vs. Industry Averages (% of Sales)

Foundry Networks enjoys a healthy gross margin on its sales, better than the industry average. The gross margins have remained steady and improving, a significant indication of Foundry’s successful product line. The high sales and marketing costs are an area that can be optimized.


Figure 2: Foundry Networks Spending vs. Industry Averages (% of Sales)

Brocade/Foundry Combined Strengths:

A merger between Foundry Networks and Brocade will allow both companies to realize economics of scale in Sales and Marketing costs. The combined entity will further boost Brocade’s revenues by offering end-to-end data networking and storage solutions.

Brocade’s storage area network expertise can be leveraged against Ethernet based networking expertise from Foundry Networks to develop the next generation Data Center switch capable of competing against Cisco Systems.


Table 2: Brocade & Foundry Combined Strengths

  1. Brocade 10-K SEC Filings for 2005-2007 
  2. Foundry Networks 10-K SEC Filings for 2005-2007
  3. 10-K SEC Filings 2005-2007 Major Players in the Networking Industry

Cisco Systems : An analysis on Organizational Structure for Competitive Advantage

Cisco Systems a company that has reinvented itself time and again has proved that the key to corporate success lies in an organizational structure that is both responsive and in tune with the changing industry and market requirements browse this site.

Phase-1: The Emergence of a Giant

In April-1997 Cisco structured its products and solutions into three customer segments: Enterprise, Small/Medium business, and Service Provider. The organizational structure was crafted to address two major new market opportunities at that time: the service provider migration to IP services and the adoption of IP products by small and medium-sized businesses through channel distribution. The change was a marked departure from a product-focused structure, which had been Cisco’s hallmark since inception back in1987, to a customer-oriented, solutions-based structure.


All of Cisco’s research-and-development and solutions marketing would be organized under the three Lines of Business. The Line of Business teams defined and implemented both market and operational strategies that enabled them to deliver end-to-end solutions to their target customers. The new organizational alignment meant increased focus on specific customer segments to provide complete end-to-end solutions, including integrated software, hardware and network management. The different market segments at the time had nothing in common. The fact that Cisco was riding high on the imploding growth in the networking industry meant Cisco did not have to worry so much on costs since margins very high.

An analysis on the effectiveness of “Product Based” organizational structure reveals the following attributes.

Product Centric Organization


Knowledge Sharing


Ability to reduce Costs


Fostering Innovation


Control and Coordination


Addressing Customer / Market requirements


Efficiency in Resource Utilization


Phase-2: The Dot-Com Meltdown

In August-2001, Cisco Systems realigned the company’s focus around changing industry and customer requirements and to reinforce the company as a dominant force in the networking industry. Customer segments and product requirements that were distinct in the past had become blurred. The downturn in the networking industry that followed the broad meltdown across the technology industry in early 2000 meant Cisco had to act quickly to minimize costs and reduce overhead. To respond to these changes Cisco zeroed in on a centralized engineering and functionally driven organizational structure.


The centralized structure was developed to bring Cisco closer to its customers, to encourage teamwork and to eliminate product and resource overlaps and more importantly to provide the industry’s broadest family of products united under a consistent architecture designed to help Cisco’s customers improve productivity and profitability. The rationale behind a centralized organizational structure was to design all equipments using a baseline standard and architecture, which lowered the cost of product development and manufacture. A centralized organizational structure fostered deeper sharing of knowledge and components across Cisco product groups while promoting more consistent manufacturing and testing to realize economies of scale.

A centralized organization structure enabled Cisco to respond successfully to changing market conditions. The company’s focus was on reigning in costs and respond to revenue shortfalls from declining growth prospects within the industry. The emphasis shifted from delivering new product launches or innovation to survival. An analysis on the effectiveness of “Centralized” organizational structure reveals the following attributes.

Centralized Organization


Knowledge Sharing


Ability to reduce Costs


Fostering Innovation


Control and Coordination


Addressing Customer / Market requirements


Efficiency in Resource Utilization


Phase-3: Convergence

In December-2007 Cisco announced a new “Technology Organization” structure to address the challenges imposed by the next phase of Internet growth and productivity centered on the demands of tremendous growth in video, the revolution in the data center, collaborative and networked Web 2.0 technologies, where the network emerged as a platform for all forms of communications and data management. The new organizational structure enabled Cisco to position itself for growth in new markets and cater to new and emerging markets in China, Brazil and India.

“The Technology Organization”:


The changes were designed to enhance Cisco’s effectiveness and efficiency globally in delivering integrated products and solutions, as well as to provide greater synergies in its development process. The need for innovation and ability to cater to different market segments that had different product requirements necessitated a move toward a product-technology based organizational structure. With the industry evolving towards a services based Pay-As You Go” revenue model Cisco had to develop products with scalability, reliability and adaptability in mind. The emphasis on software and centralized nature of the Software Group allowed Cisco to access resources globally while driving integration and interoperability across all of Cisco product lines.

An analysis on the effectiveness of the “Technology Organization” structure reveals the following attributes.

Technology Centric Organization


Knowledge Sharing (Across Divisions)


Ability to reduce Costs


Fostering Innovation


Control and Coordination

Medium – High

Addressing Customer / Market requirements


Efficiency in Resource Utilization



1. Cisco’s Technology Vision for the evolutions of Networking.
2. Cisco Systems Corporate Timeline