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Products and Services, A Simplistic View August 2, 2009

Posted by Tim Rodgers in strategy.
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This isn’t original thinking, but here’s why it’s tough to build a successful, sustainable business around hardware products:

  1. You might have a great idea for a solution that solves a problem, but if there’s a growing market and profits to be made, eventually other people (competitors) will follow. If the market is small and your solution is truly unique, you’ll probably be able to enjoy relative peace for awhile, although customers hate feeling like they have no choice.
  2. When competitors arrive, your product eventually becomes commoditized, unless (a) you find a niche (see Apple), (b) you build barriers to entry (e.g. patents), and/or (c) you’re prepared to continually invest in technology or other differentiators to maintain your unique advantage. In PCs, Dell had a fantastic system of supply chain management and inventory control, but eventually HP figured it out and passed them by. Apple is cool, and that’s the result of their on-going design innovations that still command a value pricing position.
  3. If you’ve got competitors and your product becomes commoditized, it’s a never-ending struggle to maintain margin. The power belongs to the buyer, especially if your product can be described with specifications that enable the buyer to comparison shop.

Services are the way to go. Services can’t be easily defined with specifications because the scope and quality depends on many non-quantitative factors. That makes it a lot harder to turn a service into a commodity, and that means the power stays with the seller. Services can be customized in many more ways than hardware products, providing more pricing flexibility and making it harder to comparison shop.

IBM figured this out about 15 years ago when they started getting out of the hardware business and created Global Services. HP is now moving in the same direction, particularly with the acquisition of EDS, but they’re a relatively-late entry to the world of consulting and IT outsourcing and they’re now aggressively playing catch-up. HP PCs and printers will continue to generate significant revenue, but the future is in services.

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