Since the 1960s the IT industry has been “dominated” by vendors with monopolistic holds on a big part of the market. It started in the 1960s with IBM and then moved in the 1990s to Microsoft as IBM lost control of the PC. It is now moving to Google. After Google, who knows?
There are also lesser monopolies, where a specific vendor dominates the market but doesn’t have the 90% share that qualifies as a monopoly. Oracle in database is an example, so is SAP in ERP. Despite their protestations to the contrary, vendors dislike competition, because it lowers margins and imperils the business. They naturally seek a market position where they can control the margin they make on sales and hence ensure profitability to some degree. So how is that achieved?
The easiest way to think of this is in terms of control points. Control points are points that enable a vendor to have some control over a market. The list that follows is a list of control points in order of importance. Enjoy.
- Own the standard. Microsoft owns Windows which has become the standard OS for PCs. Nothing short of an antitrust ruling can shift that. This confers a monopoly situation when the product becomes a market standard via market force.
- Manage the value chain and the channels. Intel stands as a good example of this. It has competition from AMD and historically has been unable to prevent competition, because it doesn’t have a lock on the x86 instruction set. However it has done very well by managing the value chain. It hasn’t even been observably predatory. But all computer manufacturers of x86 computers of any size need to deal with Intel because of its dominance and it leverages this. Xerox is a good example of a vendor that had no lock hold on photocopying and did a good job of managing the value chain for many years and then one day, they gave the competition breathing space in, and their grip on the market quickly collapsed.
- Market Leader. Having actual market leadership gives you economies of scale that boost profits. The extra revenues allow you to control the market better than any competitor in many ways; from attracting partners through to aggressive pricing. The customer belief that a company is the market leader can become a self-fulfilling prophecy so marketeers claim market leadership with even the thinnest sliver of evidence to support the assertion.
- Customer Lock-in. If customers feel locked in it becomes a negative, so the trick is to provide a product that is difficult to move away from for whatever reason. With computer hardware, for example, blades are better than servers because once you have bought a blade chassis you’ve committed to its power management and cooling, and you’re likely to fill the cabinet before considering any other vendor. The trick from the vendors perspective is to make the product stickier so that an initial purchase naturally suggests further purchases and automatically raise the cost of competitor products. It can be achieved with technology or the licensing arrangement or support or even the financial structure of the deal. Bundling is a form of customer lock-in frequently used in software sales. The vendors adds other products to a bundle virtually (or actually) giving them away. The hope is to lock you in to a set of technologies or to lock other vendors out. Microsoft’s bundling of Internet Explorer was clearly about locking Netscape out. Customer lock-in is also competitor lock-out.
- Owning the Customer Relationship. This is inferior to outright customer, lock-in but it has a similar effect. Effective sales staff don’t just sell they form relationships and act as informal advisers to the customer. In many circumstances the company that owns the relationship doesn’t just get the sale but also determines, which other vendors (i.e. partners) may get to participate. For example, right now there’s a battle going on for who owns the customer for client virtualization. In some sites, Citrix is the incumbent vendor that owns the relationship. In some sites it’s HP or Dell (the vendors that provide PCs). In some sites it’s VMware because they have already sold server virtualization. In some sites it may be Microsoft. In some sites it may be the Systems Integrator who is advocating client virtualization. It is a dynamic situation but it will not stay that way for long. Eventually one or two of these vendors will move up the chain to Customer Lock-in and Market Leadership.
- Major Product Differentiation. Think of the differentiation between an iMac and a PC. You are appealing to the same buyer but are selling a distinctly different product. You cannot substitute one for another. This is not the same as, for example, comparing one digital camera to another, because the differentiation is so great. Differentiation of this nature naturally works against one of the two product lines that are competing. It used to work against Apple but now it works for Apple. Note that the vendor needs to control the level of differentiation, increasing it when there is market momentum, but decreasing it if momentum fades. Major differentiation naturally leads to customer lock-in. Major differentiation usually derives from: applicability, usability and style – or a combination of these.
- Brand, patents, copyright. It’s fair to put all of these things on the same level although how binding each of these things are depends upon circumstances. Brand becomes more powerful as you move to market leadership. Below that it only defends you against “passing off” and it may not defend you against that internationally. Patents and copyright have dubious value internationally too. All can be circumvented and it’s usually difficult to put a stop to patent violation without entering into a long legal battle. However, the creation of patents, brands and copyright place obstacles in the way of competitors, and hence slow them down.
- Cost/Price Control. If any vendor can produce at significantly lower cost than the competition (say 20% lower) then they have a level of price control, which can prove to be a significant advantage. Note that this is normally trumped by items higher up in this list. Also note that in the IT industry the market leader normally achieves price control by virtues of economies of scale. Also note the failure of many Open Source products to gain significant traction despite having the lowest possible price. In commodity markets the lowest cost wins. In mildly differentiated markets it’s a factor.
- Product Differentiation/Functionality. Minor product differentiation rarely lasts long. Competitors simply catch up. Indeed, the usual scenario has competitors leapfrogging each other until a product is so weighed down with features that the customer is confused and unable to recognize significant difference.
An extreme situation of any kind naturally promotes the control point up the list in importance. So extreme cost control , where you can deliver a product with costs that are 90% lower than the costs of competitors clearly, is probably worth as much as 6. Major Product Differentiation (because it is major product differentiation).
Under normal circumstances vendors climb this Control Point Ladder from rung 9 to rung 1, if they can, applying the tactic of each rung as they reach it.
By the way, I know that lists like these are supposed to have ten entries, but this only has nine.
