Vertical Vertigo

Being a marketing consultant, I am often caught in the intersections of market movements. Some weeks different clients will call with different issues, that are exactly related.

It’s been several of those weeks.

Three of our clients called concerning their products, their partnership with IBM, and how to shift their sales focuses to leverage partner strengths. All these calls reminded me that we are in the middle of a largest change in the IT business the industry has ever encountered, and not many vendors get it.

In previous white papers, I have virtually shouted about the nearing commoditization of enterprise information technology (EIT). There are forces of economics at play that defy resistance, which is futile (even for Microsoft). Only a handful of firms have grasped this and maneuvered to thrive in the new reality.

One tactic for survival is to change your point of value (POV). Traditionally, IT vendors have sold features, functions and benefits (FFB). This was well and good when bright engineers at competing vendors could dream-up new features and functions, an in those rare technology firms that had caffeinated marketing departments that could translate those into statements of benefit. Way back then, FFB’s were the POV (m-o-u-s-e).

But, no exciting differentiator was better than what CxO's really wanted — namely bland sameness. Exhausted from decades of vendor lock-in, the market demanded that technology become a commodity. Hence the shift to UNIX, then the shift to WinTel/LinTel architectures, and ultimately to Linux everywhere (“Linux — the Universal Operating System” a catch phrase we fed to SUSE, and one inherited by Novell).

So in a world where you are now forced to sell either commodity products, or exotic niche technologies, what do you do? There are many answers, but it always helps to watch the big guys . . . and they don’t come bigger than IBM.

Back in the 1980’s, IBM realized that this market shift was going to hammer profit margins on hardware and eventually on software. So IBM did three things.

  • First, they ramped up on services, which have nice, fat margins and would experience greater demand as IT struggled to create new competitive advantages.
  • Second, they forced their competitors into a box by accelerating the rate of change toward Linux, commodity hardware — places to where neither HP nor Sun could afford to switch (the cute aside here is that once people are happy with commodity hardware and Linux, they start thinking more about software, which is where IBM held the lead and HP/Sun could not hope to develop products fast enough).

But, the important part was “going vertical”. When services become more important than products, the service you provide requires deep knowledge of your customer’s line of business. You need to understand their value chain, where they make money, where they waste money, and how your products and services can help them.

You cannot do this without focusing on industry verticals. Period. Get used to it.

And, that is what IBM did — shifted their marketing and sales focus to industry verticals. And then they extended that strategy further by refocusing their competitor-killing Linux and Java efforts around industry verticals too. Think for a moment about the chain of value being created:

  1. We’ll sell you the same hardware and Linux as anyone else
  2. But we’ll tell you how to get the most value from it, because . . .
  3. We know your business as well as you

IBM has shifted their POV away from where their competitors make money, and into a place that requires a lot of new expertise to compete. More importantly, IBM has aligned themselves with what the market had been demanding for decades — that the infrastructure be a commodity and that the value of the relationship was focused on improving the customer’s business.

Oracle too has validated this new reality, though they see money yet to be made in supplying enterprise application software (we’ll see what folks like SugarCRM think about that). Oracle is also realigning on industry verticals, and buying their way into being an application vendor who also sells databases. Larry ain’t dumb.

So how will HP and Sun compete? As of today, they aren’t.


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