Appendix A: Strategic Position and Action Evaluation

A.1 Industry Assessment

Factors Determining Environmental Stability (ES)

In the following section the number in parentheses is the value assigned to a factor. The factors and their assigned value are summarized in Table 1.

The internet software industry is still in the takeoff phase,- standard platforms have not yet been established and new technologies are constantly being developed. Thus technology is changing at a fast pace (1). The major market for internet software is still the United States where 76 percent of all internet users are located. The inflation rate in the U.S. is low and has been relatively stable for a long time (5). With many companies in the industry, strong market growth, and no established standards, demand variability is fairly large (2). The price range of competing products is very wide with some programs being distributed for free while other similar programs are being sold at regular software prices (2). A combination of lack of standards, low capital requirements for upstart companies, and plenty of interested venture capitalists, means that barriers to entry are low (2). Competitive pressure is more difficult to determine. Due to the rapid market growth, competition is generally not very intensive despite the great number of companies. However, in the more mature browser market competition is fierce. Overall competitive pressure is increasing but the industry has not begun to consolidate yet (4). Price elasticity of demand is fairly elastic because customers can easily switch to a competitors products (3). The average for ES value after subtracting 6 to get a negative number that can be plotted in the coordinate system is -3.3.

Factors Determining Industry Strength (IS)

With the market for internet software estimated to grow by 467 percent from 1995 to 2000 and the number of web users increasing by 1,589 percent in the same period, the growth potential (6) and the profit potential (5) is enormous for the companies in the industry. Financial stability (2) is relatively low in the industry - because the focus for most companies has been on market share rather than income it is uncertain how users will react to having to pay for software. In addition the technology is developing so fast that all companies face the risk of being leapfrogged by new technology from a competitor. That also means that technological know-how is a key success factor in the industry (5). Resource utilization is generally efficient because it is relatively easy to adapt capital investment in fixed assets to market share and revenue in the industry (4). Capital intensity (4) is currently not very high but is expected to increase markedly because of increasing R&D costs. It still easy to enter the industry since no clear market leaders have been established yet and because capital intensity is still low (2). Productivity and capacity utilization (2) is not very high - companies in the industry are growing very fast and are focusing more on expansion than efficiency. The average value for IS is 3.8.

Table 1: Industry Assessment.

A.2 Company Assessment

In Table 2 the factors used for company assessment and the values that have been assigned to each company are summarized.

Table 2: Company Assessment.

Adobe Systems

Factors Determining Competitive Advantage (CA)

Adobe's exact market share in the web authoring and publishing software segment of the industry is unknown, one of the main reasons being that Adobe has distributed some of the company's programs (particularly the Adobe Acrobat Reader) for free on the internet. But the company has some of the most popular authoring and publishing programs such as Adobe FrameMaker, Adobe PageMaker, and Adobe Photoshop. Adobe also has the advantage of being industry leader in the 'regular' software market for publishing programs. Thus Adobe's market share is estimated as being high (5) and their product quality is also very high (5). The transition to electronic publishing on the internet is still in an early stage and so the products that Adobe makes can be considered to be early in their product life cycle (5). The product replacement cycle is short (2) because technology is changing fast and the company has to release new products often in order to remain competitive. Adobe benefits from a rather high customer loyalty because of the high standard of the company's products and because users are reluctant to switch to a competitors products once the have learned how to use the tools from Adobe (5). Capacity utilization varies in the industry. Among the smaller competitors capacity utilization is high so these companies generally have little capacity left for rapid expansion and investment in R&D. However the bigger competitors, primarily Microsoft, have excess capacity which poses a strong threat to Adobe (2). The technological know-how of the company is very high (5). Adobe is established in all the major markets and has a well-developed distribution system and the vertical integration may be said to be fairly high (4). The average CA value for Adobe after subtracting 6 is -1.9.

Factors Determining Financial Strength (FS)

Adobe is generally a financially strong and sound company (see Table 3). Return on revenue was 12.26% in 1995 which is acceptable although not impressive in the software industry (4). The company has a solvency ratio of 78.9% which is very high and the company's leverage must be said to be well-balanced (5). The high solvency ratio also indicates a high degree of liquidity and in fact the company has most of its assets in the form of current assets. The current ratio is 3.7 which again is very high and Adobes liquidity is therefore very good (5). In terms of capital required vs. capital available the company should thus have enough capital available for expansion (5). Adobe has a positive cash flow that has been increasing in the past years (4). Financially market exit from the internet software industry would be relatively easy for Adobe although it would be strategically unwise (4). Since Adobe isn't very diversified the company has much at risk in the business (2). The average FS value for Adobe is 4.1.

Table 3: Adobe Systems. Key financial figures. In USD millions.

Microsoft

Factors Determining Competitive Advantage (CA)

Currently Microsoft's market share in the internet software industry is low (2). When compared to Microsoft's main competitor, Netscape, the product quality of Microsoft's internet programs is also rather low (3). As is the case with the two other companies examined here, Microsoft's products are in the early stage of their life cycle (5). Product replacement occurs often in order to keep up with the competition (3). Microsoft hasn't yet build up much customer loyalty for the company's internet programs but it must be expected that Microsoft benefits somewhat from customer loyalty for the company's other programs (4). Microsoft's competitors, notably Netscape, generally have high capacity utilization and therefore have limited capacity available for expansion (5). Microsoft has 4,000 software developers, a R&D budget of more than 1 billion dollars, and has been industry leader for many years, and the company's technological know-how is therefore high (5). The company has a vast marketing and distribution network and is also involved with distribution and development of content via the internet (through the Microsoft Network) and must thus be seen as having a high degree of vertical integration (6). After subtracting 6 the average CA value for Microsoft is -1.9.

Factors Determining Financial Strength (FS)

Microsoft has consistently managed to have a 25 percent net margin over the last five years and return on investment is very high (6). The company also has excellent leverage (5) and liquidity and Microsoft's shareholders have also authorized the issuance of up to 100 million shares of preferred stock so liquidity should not in any way be a problem for Microsoft (6). That means that the company has a good ratio of capital required vs. capital available (5). Microsoft maintains a positive cash flow and according to the annual report no problems are expecting in this area (5). Although Microsoft has invested heavily in internet software, the company is sufficiently diversified and has such a strong position generally in the software market that exit from the internet software market would not be financially impossible for Microsoft though it is unlikely for strategic reasons (4). Because Microsoft has a diversified product portfolio the financial risk involved for the company in the internet software industry is presently rather low, although, again for strategic reasons, the risk may be considered high (4). The average FS value for Microsoft is 5.

Netscape

Factors Determining Competitive Advantage (CA)

Netscape has a high market share in the web server software segment and especially in the web browser segment of the internet software industry. It is estimated that the company currently has between 65 and 80 percent of the web browser market and Netscape may have achieved critical mass in this segment which would put the company in a standard setting position (6). The quality of the company's programs are high (5) and as is generally the case in the industry the products are in an early stage of their life cycle (5). Product replacement occurs often which is necessary if Netscape wants to remain industry leader (3). The company has already build considerable loyalty among its users (5) because of excellent products that are user-friendly not to mention free! The capacity utilization of Netscape's main competitor, Microsoft, is still relatively low which poses a threat to Netscape since it means that Microsoft has capacity available for expansion (3). Netscape's technological know-how is very high and its products are the most advanced within the server/browser segment of the industry (6). Netscape has achieved some degree of vertical integration in terms of international distribution but not to the same extent as Microsoft (4). The average CA value for Netscape after subtracting 6 is -1.4.

Factors Determining Financial Strength (FS)

Netscape uses all revenue for expansion and R&D and as a consequence has a negative income, and the return on investment is therefore negative (1). Most of Netscape's capital needs for expansion have been financed by issuing shares so the company isn't heavily indebted and leverage is remains fairly well-balanced (4). With a current ratio of 3 the liquidity is good (4). Capital available vs. capital required is low because the company is expanding so fast and has try to keep up with Microsoft (3). According to the 10Q management doesn't foresee any cash flow problems during 1996 (4). Exit from the market would be very difficult for Netscape since internet software is the company's main market (1). The risk involved for Netscape is therefore greater since the company has a rather narrow product portfolio (1). The average FS value for Netscape is 2.6.

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