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Shifting the Ground-rules of Tech Business

October 2002 Corporate

An attractive concept in high-tech business is that ideas are the trump card in setting corporate strategy. The creation and possession of intellectual property separates the power of technologically driven companies from other B2B businesses in their management of the industry landscape.

For instance, consider how intellectual property can change negotiation power between suppliers and customers in B2B businesses. A third-tier parts manufacturer and their negotiating position with GM to that of a small tech firm with a new patented approach to managing data protection. The third-tier parts supplier is in a weak position in their negotiation with GM and GM can force them to become price takers in direct competitors with alternative suppliers. The intellectual property driven technology suppliers however has been in a stronger negotiating position. GM’s options in dealing with a tech firm are to do without, select an alternative offering, or build it in house. If the intellectual property truly provides value and differentiates the value offering, GM will accept the price that they demand as long as it is below the benefits that are provided by the intellectual property.

Alternatively, consider how intellectual property is a competitive equalizer between large and small companies. On Oct 14, 2002, the Wall Street Journal ran a survey of companies providing information security software to businesses. In this article, N. Wingield compared Check Point Software Technologies, with 1200 employees, side by side with Entercept Security Technologies of 80 employees, NTRU of 31 employees, and Cenzic of 20 employees. While the company sizes were widely different, their perceived ability to compete for business was equal.

Unfortunately, competing on intellectual property alone has its limitations. As the Economist writes on August 24, 2002, “IT grows up”. Large corporations are more reticent to upgrade their software in that the value provided doesn’t outweigh the costs to change. In making new sales, businesses are finding the competition is better able to match their value offering than they were in the past. In short, IT and hardware is becoming just another supplier to other businesses. Proof: witness the shift in strategy of both IBM and HP towards service and away from product.

This shift in power between suppliers and buyers in IT is partly due to the economic downturn. Today, it is much easier for firms to find skilled IT professionals than it was in 1999. We see far fewer articles about the shortage of skilled IT workers and many highly qualified individuals are searching for a position or considering switching to a new career. It is also partly due to the fact that technology improved far quicker than many businesses were able to adjust too. For instance, consider the exceedingly large glut of broadband capacity in fiber optic cables. Today, if all the data moving on the internet was to be channeled through Chicago, there still would be some spare capacity. Although the switches may be unable to handle the increased demand, the cable would not be saturated.

Given this shift in the tech-driven industry landscape, what should a business do? Ron May has lamented the decline in the number of “Cowboys” many times in his column and he is right. The cowboys are being replaced with business people.

The next competitive frontier of high-tech businesses is old-fashioned business. Supplier management, Employee Management, Leadership Training, Customer Management, Channel Management, Marketing Communications, Activity Based Costing. Each of those aspects that we have been enabling corporations to improve is now becoming the focus of improvement for tech companies. Managing these issues isn’t as glamorous as finding the next big idea, but they do provide sustainable profitability and predictable revenue. At the end of the day, that is the core mission purpose of business.

Technology will reemerge as the trump card in business strategy, but for the current round of competition, sound business policy and strategy is required.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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