Saturday, August 15, 2015

A scenario

A scenario for you to run through. Have a think, write down your answers and later on I'll add a post as to things you should have considered.

The Scenario

You’re the CEO of a UK based company serving the European Market. Your company produces a software system that monitors a data centre's consumption of power in order to determine whether power is being used effectively. The system involves a proprietary software system which runs analytics across a data from a sensor that is attached into the data centre. The sensor is a highly expensive piece of kit which monitors both the electricity input into the building, the temperature of the building & airflows. The analytics software is based upon best practice for use of this sensor. The sensor itself consumes conversion data that your company creates.

You’re profitable with a revenue in excess of £100M p.a., a net margin of 15% and an annual growth rate of 20%.  You have a healthy cash flow and reserves of around £25M.  The process of setting up a new client involves installing a sensor, setting up the equipment and a two year license fee for the software. Around 40% of your revenue comes from re-occurring license fees and 85% of the initial 1st year costs for a client is related to the purchase of the sensor.

Whilst you have some competitors in Europe, most of these are custom built solutions. You’re the only with a software product. There’s a more developed market in the US and even a software as a service offering which uses the same sensors but the software is sold on a utility basis rather than a license fee. The US solution also provides cross company reporting, industry analytics and a public API, something which your system does not. However, as your head of marketing points out, the US competitor (a much larger company) has been operating in Europe for almost 7 years and represent less than 3% of the market though their CEO claims they are growing rapidly and doubled in size last year. There are a number of other company products built on your competitor's APIs and a fairly active development community on this. However your head of sales chimes in that we rarely come across them in competitive tenders and in any case there have been some blog posts about your competitor 'eating up' the business model of some of those products by adding similar capability into their own system. The head of sales points to data showing that in the European market, your company has around 40% MaSh (which is holding steady) and the current market represents 70% of the total applicable market. Both the head of sales and the head of marketing agree we should focus on increasing our MaSh (market share) by focusing on sales and advertising.

Your head of operations points out that there is a range of new, more commodity like sensors that has been launched in China by an extremely large and well respected manufacturer. They’re far simpler, vastly cheaper (about 1/100th of the price) and highly standardised. However, they are also basic and lack the sensitivity of the sensor we use. The product manager points out that we have attempted replacing the expensive sensor with one of these cheaper versions but the performance and analysis was severely degraded. The product, operations and sales manager all agree that these cheaper sensors aren't upto the job. In the conversation, the product manager points however to another opportunity. One of the significant costs in the system is in the conversion data which requires extensive testing and modelling of various bits of kit within the data centre.  Whilst this is done in-house, there is now a product available on the market which offers this conversion data. It’s not as good as our data at the moment but the product is vastly cheaper than our in-house operations and we could therefore reduce costs here.  Your head of marketing supports the idea as there is some recent evidence that despite the benefit (in terms of energy savings through efficiency) that the system allows, there is some concern over the high cost of the software in the market. The product manager believes we should investigate though this was faced with some resistance from both the head of operations and the head of IT. You do not feel you have a deep enough technical understanding to answer this.

On the revenue side, the head of sales points out there is a growing market of data centres in Brazil which currently no-one is providing a solution for. They consider this to be a highly attractive future market and would like to investigate. Your head of strategy also agrees. 

The new strategy which is focused on a vision of “Growth and sustainability in the data centre business” has highlighted a number of possibilities. First is expansion into overseas markets such as Brazil. Second is provision of a more digital service including a cloud based service for provision of the software (enabling aggregated reporting) but provided on a license basis in order not to create conflict with the existing model but also to counter any threat from the US system.  Thirdly, we should undertake a significant marketing campaign to promote our solution in the existing market. Lastly the report focuses on efficiencies in operation including investigating the use of the data conversion product that is available. 

What do you do?

Add your 'answers' in the comments below.

Once you're done, then you can move onto The Analysis
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