Growth Strategy

Information Technology Industry: Business Drivers, Strategies, Risks, Money-Making & Future Outlook

Nitin Garg23 Comments

ITWell, before we talk about the money-making process, let’s try and understand the key business drivers of the technology industry. And by technology, I’m referring to Computer Software and Hardware (excluding mobile handsets/cellular phones) industry. I’ll combine the money-making process along with the business drivers.

Key business drivers of technology industry

(1) Cost of sales

For a technology company, the cost of sales is fairly low. The Cost of Sales include

  • Cost of technology upgrades (including cost of development). Usually the upgrades are released every year.
  • Cost of hardware refresh: Usually, most of the technology companies have an enterprise wide agreement for their server and storage upgrade [like IBM (NYSE: IBM), HP (NYSE: HP), Dell and Oracle (NYSE: ORCL)] and networking equipments upgrade like Cisco (NASDAQ: CSCO). The refresh period is usually 3-5 years.
  • Cost of documentation, duplicating software, training, packaging (if media is supplied) and cost of maintenance (predominantly data center maintenance other than what has been specified in ‘Point b’ above): Now-a-days, most of the companies enable software download feature to avoid costs associated with documentation and media.

These three costs account for 15-20% of the sales revenue, leaving 85% for Selling, General and Administrative Expenses (SG&A), Marketing and Research & Development (R&D). Hence, it’s not surprising to see Technology companies investing handsome amounts in Marketing and R&D. To give you a perspective, in FY11, Oracle invested $ 4.5 billion in R&D. With $ 35.6 billion in total revenues, that’s 12%, a good investment for Oracle.

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Seven questions to ask yourself before executing your product idea

Nitin Garg1 Comment

There are four aspects that needs to be covered when we think of a new product idea.

Product Strategy

  • What problem is my product solving?
  • How is it different from the existing products in the market? What is its USP?
  • How does it fit into my existing product line (assuming this is not a start-up)? This is very important thought as there is always a danger of cannibalizing our own product that may be generating good revenue. At times, we might have to evaluate the amount of revenue your latest product will generate compared to its predecessor.

Customer Strategy

  • Who is my customer?
  • Why is he going to buy from me? What’s the value he gets?
  • How do we reach them? Can we reach them through Internet? (Internet is revolutionizing the way we do our business today)
  • How do we retain them?

Market Strategy

  • How does it affect my existing product line? Is it going to replace them? Does it cannibalize them?
  • Is this idea a reaction to my suppliers’, customers’ or competitors’ move?
  • Does it increase my sales revenue or my customer base?
  • Is the idea catering to a new market? If yes, we might want to look at many aspects, but predominantly barriers to entry and exit, players, size, growth, life-cycle of the economy and industry, impact of technology (internet), …
  • Who are the players in the market and their market share? How would the competitor respond to it?

Financing

  • How would you finance the product launch, if we get a ‘Go-ahead’?
  • What happens if the economy sours? How will I pay the debt, if I’m raising funds for it?

We need to understand the supply and demand aspect of the game. Many a times, we invest in new things only to realize that it’s a “desire” (and not a need) in the market. We approach the prospect and try to force sell them by continuous education/campaign. That is when the cost goes up. I suggest we do a demand analysis with a strong perspective on competitors move in such an area, and then try to find out why the other players haven’t done anything with it.

Questions I’d ask myself are:

  • Is there sufficient demand for such a product idea?
  • What’s the supply?
  • Why haven’t others identified it yet?
  • If they have, what are they doing with it?
  • Have they tried to cater to the need?
  • If they failed, what’s the reason behind it?
  • Are there any substitutes for it?
  • What are the barriers to entry and exit?

This post originally appeared in one of my blogs in public CXO forums: 

https://www.linkedin.com/groups/Seven-questions-ask-yourself-before-50556.S.263673928?view=&srchtype=discussedNews&gid=50556&item=263673928&type=member&trk=eml-anet_dig-b_pd-ttl-cn&fromEmail=&ut=3uETgoUjty-5Q1

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Copyright Nitin Garg | All Rights Reserved

How would you add an extra $10m in revenue in the next year?

Nitin GargLeave a comment

First, we need to understand the external factors – economy and industry. The questions that we need to ask ourselves are:

  • What’s the size of the market?
  • What’s its growth rate?
  • Which stage of the life-cycle is it in?
  • Performance for the last 2 years (it would be very difficult for a start-up to take a leap unless we have ample amount of “qualified” pipeline to generate this revenue). I suggest we do a comprehensive analysis and do a Specific, Measurable, Achievable, Realistic and Time-constrained (S.M.A.R.T.) projection to avoid disappointment and hence the cost of the effort (which can be huge).

Growth Strategy

  • Increase distribution channels
  • Diversify product line
  • Increase product and services
  • Acquire competitors (this needs cost-benefit analysis and due diligence of M&A targets)

Increase Sales Revenue

  • Increase price. This has to be done with caution and need smart approach to pass it on the customer. We need to anticipate the competitors’ response and check the substitutes available in the market. Otherwise, the customers/prospects will run away from you! 😉
  • Increase per unit sale
  • Increase volume (get more buyers, increase distribution channels, hire sales force, …)
  • Create a seasonal sale, if applicable
  • Invest in major marketing (one that has proven to be fruitful). Digital marketing is most cost-effective and efficient for larger target audience. We can hire an advertising agency for this with KRA like number of leads and conversion rate for the pay-off.

There might require certain changes to the pricing strategy as well as compared to your competitors’ price

This post originally appeared in one of my blogs in public CXO forums:

https://www.linkedin.com/groupItem?view=&gid=50556&type=member&item=264797155&commentID=155864030&report.success=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_155864030

If you wish to gain any privilege to this blog, please write your message to the author through the page “CONTACT ME” by filling in the required details in the form, OR by dropping an e-mail to him at nitin@gargfinanceblog.com

Copyright Nitin Garg | All Rights Reserved