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TECH TALK: Good Books: The Business of Software (Part 2)

June 10th, 2004 · No Comments

CIO Insight reviewed the book The Business of Software by Michael Cusumano:

In what could have been called Technology Management 101, Cusumano argues that software companiesthe focus herecan choose from three business models: They can be a products company (Microsoft); they can be a service company, providing consulting, systems integration and maintenance (Cap Gemini Ernst & Young); or they can be a hybrid, providing both products and services (IBM).

Nothing more basic than that, right? Then why do so many software companies get it wrong? One reason, Cusumano argues through case studies of companies ranging from AT&T to Toshiba, is that firms migrate, without sufficient thought, from one model to another in an attempt to capture more sales and earnings, all the while failing to staff up appropriately when their focusor lack of itchanges. If you think this central thought is too basic, give yourself exactly 60 seconds and see how many failures you can name in the $600 billion software industry.

Cusumano’s preferencelike that of most people who help fund start-up software venturesis the product approach: It’s easier to manage and has the possibility of becoming much more profitable. He is quick to point out, however, that one business structure is not inherently better than another.

When it comes to business models, the issues are twofold. First, you need to know what kind of company you want to be so that you can allocate resources effectively. Product companies need to organize in teams that focus on producing the best offering for a clearly defined market. Software service companies need to create relationships with their customers. As Cusumano writes, software service companies should “build technologies that look like products, or can be packaged in some way, but generally they cater to the needs of their individual clients.” Second, you need to realize that it is all well and good to change your customer mix over time (if that’s where the profits are), but your business model needs to change as well.

At the end of the book, Cusumano looks ahead: Firstly, we should always remember that bubbles are just that bubbles. They expand and then burst. It follows that good times for technology-based companies must return. The question is when and at what level, not ifSecond, history provides some guidelines for thinking about the futureMost new opportunities for software entrepreneurs comes with new hardware or computing platforms and niche applications, often for new platforms. This observation tells me to watch for new software opportunities at the forefront of hardware innovation and platform evolutionFinally, there is another chasm for software companies to cross. That chasm is the truly novice user the 5 billion or so people in the world who do not own a computer.

In these few sentences, Cusumano captures the next set of opportunities in the world of software: creating next-generation computing platforms for the worlds emerging markets. Can India be the home to the worlds next Microsoft? The book has plenty of ideas for entrepreneurs in what still remains the worlds most exciting and fascinating industry.

Tomorrow: Realtime


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