Strategy for Software Companies: What to Think About

Michael A. Cusumano

This talk discusses major strategic issues for software companies, such as the difference between products and services, horizontal versus vertical markets, enterprise versus individual customers, and mainstream versus niche markets. In particular, the talk focuses on the most common debate one hears among software entrepreneurs and managers of new software businesses: Do you want to be a services company or a products company?Most software companies want to sell standardized products because, once you have developed the product, selling one copy or a million copies costs about the same. The conventional wisdom is that products are the way to grow a company rapidly and profitably. In contrast, software-related services are labor intensive.A company can grow revenues only as fast as it can hire new employees. However, data on the software business during the past decade suggests that creating a successful software products company is actually very hard to do. Moreover, in bad economic times, such as the recent Internet bust, customers often refuse to buy new software products or pay high prices. The only revenues left to many software companies are those from long-term service and maintenance contracts. So the best business model at least for an enterprise software company may not actually be the products business, but some combination of products and services. This presentation argues that this combination is the best strategy, even though conventional wisdom also says that products and services are very different kinds of businesses and difficult for the same company to do both well at the same time.

Biographical Sketch of Michael A. Cusumano

Michael A. Cusumano is the Sloan Management Review Distinguished Professor at the Massachusetts Institute of Technology's Sloan School of Management. He specializes in strategy, product development, and entrepreneurship in the computer software industry, as well as automobiles and consumer electronics. He teaches courses on Strategic Management, Innovation and Entrepreneurship, and The Software Business.

Professor Cusumano received a B.A. degree from Princeton in 1976 and a Ph.D. from Harvard in 1984. He completed a postdoctoral fellowship in Production and Operations Management at the Harvard Business School during 1984-86. He is fluent in Japanese and has lived and worked in Japan for seven years. He received two Fulbright Fellowships and a Japan Foundation Fellowship for studying at Tokyo University. He has been a visiting professor in management at Hitotsubashi University and Tokyo University in Japan and the University of St. Gallen in Switzerland, and a visiting professor in computer science at the University of Maryland. He has consulted for some 50 major companies around the world, including Alcatel, AOL, AT&T, Business Objects, Cisco, CuraGen, Ericsson, Fiat, Ford, Fujitsu, General Electric, Fidelity, Verizon, Hitachi, i2 Technologies, IBM, Intel, Lucent, Motorola, NASA, NEC, Nokia, NorTel, Robert Bosch, Schlumberger, Siemens, Texas Instruments, and Toshiba. He has been a director of NuMega Technologies (sold to Compuware in 1998 for $150 million) and Infinium Software (sold to SSA Global Technologies in 2002 for $105 million), as well as other private and public software companies. He is currently a director of Patni Computer Systems (software outsourcing, based in India) and Entigo (warrantee management software) and an advisor to NetNumina Solutions (internet architecture and custom solutions), firstRain (wireless and web services software), H-5 Technologies (digital search technology), and Sigma Technology Group PLC (early stage ventures). He has also served as editor-in-chief and chairman of the MIT Sloan Management Review and writes periodically for Communications of the ACM, The Wall Street Journal, Computerworld, The Washington Post, and other publications.

Professor Cusumano has published eight books. Microsoft Secrets (1995, with Richard Selby) is a best-selling study of Microsoft's strategy, organization, and approach to software development, and has approximately 150,000 copies in print in 14 languages. Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation (2002, with Annabelle Gawer) examines how industry leaders orchestrate complementary innovations that make their platforms more valuable. Competing on Internet Time: Lessons from Netscape and its Battle with Microsoft (1998, with David Yoffie), was named one of the top 10 business books of 1998 by Business Week and Amazon.com, and played a central role in the Microsoft anti-trust trial. Thinking Beyond Lean: How Multi-Project Management is Transforming Product Development at Toyota and Other Companies (1998, with Kentaro Nobeoka) analyzes product development and platform strategies in the auto industry. He is also co-editor of Strategic Thinking for the Next Economy (2001, with Costas Markides) and author of Japan's Software Factories: A Challenge to U.S. Management (1991) and The Japanese Automobile Industry: Technology and Management at Nissan and Toyota (1985). His latest book, The Business of Software: What Every Manager, Programmer, and Entrepreneur Must Know to Thrive and Survive in Good Times and Bad, was published in March 2004.

Contact Information:
MIT Sloan School of Management Email: cusumano@mit.edu
50 Memorial Drive, Room E52-538 profile http://web.mit.edu/srolph/www/michaelcusumano.html
Cambridge, MA 02142-1347 USA Tel: 617-253-2574. Fax: 617-253-2660