Fighting yesterday's war

This note on Strategypage about France's efforts to develop an EMP warhead struck off an interesting chain reaction of thoughts in my head about strategy in a complex world. France is right about developing this system, just as the U.S. is right to develop the MDS, because at it's core these systems change the nature of the threat that the west is facing, at least insofar as a state-organized attack (terrorist is another thing altogether, but that doesn't mean you ignore one threat to focus all of your attention on another). The EMP that France has developed neutralizes a possible Iranian threat, irrespective of how many nuclear weapons they may develop - that's a game changer. Stealth was  a game changer for the U.S. in recent conflicts, ensuring that air superiority could be achieved with minimal loss, and "smart" weapons delivered a force multiplier that could not even have been imagined in earlier conflicts.

Moving onto General Motors, which of course is in the mist of a great many challenges that threaten the company. People say "well if they just made better cars then everything would work out," and at the end of the day that is certainly one thing that they need to continue to improve. However, I think they do make some pretty nice cars, the Corvette is a coveted icon of over 40 years, the new Cadillacs are really nice (XLR in particular), their small car lineup is fuel efficient and reliable, and cars line the Pontiac GTO are screamers. On top of all that, the company leads U.S. manufacturers in initial quality, and indeed tops many European nameplates.

So what is it behind GM's problems? Well for starters they have $64 billion in unfunded retiree health care obligations that add $1,300 to the cost of each and every vehicle they make. They need a game changer to overcome this obstacle, but even if they do they are fighting yesterday's war because GM is far more than a car company. GMAC is more than just a vehicle finance company GM's controls, it's a mortgage finance company as well ("lost another one to ditech.com") and GMAC's credit ratings are linked to GM's, meaning GMAC is at a disadvantage in the commercial paper market. GM's profit driver is at a huge disadvantage because of the other problems, including Delphi, that GM is facing.

The real bottom line on GM is that "building better cars" is really fighting yesterday's war. Getting the economics right on the cars that they are are building is the war they have to fight, and win.

All of this comes to the issue I face everyday, namely how do we increase our competitiveness against Oracle. When asked, people invariably come up with a mix of build better technology and products as the core answer, or we need to sell better, and while they are right they are also fighting yesterday's war.

We always need to innovate new products and technologies, but the reality is that large companies do very little innovation, what they do very well is commercialization, so I'm not sure that better products and technology are the answer at all. On one hand we need to improve the economics for our customers but we also need to increase our own productivity so that we grow by means other than just adding headcount and buying companies.

This is the thing that worries me about the acquisitions that Oracle is making in open source software, what if they came to the conclusion that they would never overtake SAP in license revenues and that the only way they could beat us was by not fighting our war but changing it. If that's the case, maybe what Ellison's crew is doing is buying their own LAMP stack and replacing the "M" with "O" and bundling in Fusion middleware with it? That would be a game changer and definitely not fighting yesterday's war. In a recent Credit Suisse conference interview, Ellison spent a great deal of time talking about subscription revenue and open source, which makes me believe he may have come to the conclusion that the only way he can beat SAP in the application business is to do something he believes we won't be willing to do, namely take away the license component of our economic model.

If the above is indeed the case it would be a very smart strategy, assuming they could execute it with the weight of their existing business on top of it (shareholders can be problematic for companies attempting this kind of shift). What's the probability of it? I don't really know but if I was them that's probably what I'd be doing instead of simply "building better products" and "selling better".


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Comments

[Rob]

I think you hit it on the head that Oracle is looking at game changers. To this end, Oracle has also bought itself a lot of option value.

One view of strategy is that you control your destiny. The other view is that you can only "nudge" your destiny a little because it's mainly controlled by market and historical forces. If you subscribe to the latter view, it's impossible to accurately say what the enterprise software market will evolve to. Although it is paying a high price, Oracle essentially purchased a bunch of future options around SAAS, Open Source, SOA, Database, VOIP, etc.