To All: My Novell Strategy Analysis. Please Comment!
Last week I posted some strategy questions to gather information
for a school paper on Novell's current strategic position. I did
not get many replies so I went back over the last few hundred
(maybe even thousand?!) postings and gathered information for
this paper. I think you have great insight into this company and
I thank you in advance for your thoughts.
Please keep in mind that my professor limited our paper to only
eight pages (and he even told us what size font to use - do you
believe this!) so I don't have much room to maneuver. However,
I am totally open to suggested changes and positive/negative
criticism. (lss1@trader.stern.nyu.edu or just post it here.)
Thanks in advance-
Leo Sanders
History
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As users began to link personal computers and workstations
together to form networks, the Network Operating System (NOS) market
emerged. Novell was the first to deliver a robust NOS, called
NetWare, that could perform the elementary functions in early,
fairly primitive networks. By working cooperatively with other
hardware and software venders and constantly improving its products,
Novell captured nearly 70% of the NOS market by 1993, with over
70,000 major installations of its popular NetWare product.
Faced with a threat from the aggressively priced Windows NT Advanced
Server, Novell launched several initiatives to counter Microsoft's
momentum. During 1993, Novell shifted away from its traditional
focus of NOSs and had made several acquisitions to broaden its
product line and compete directly with Microsoft in all major market
segments. Novell tried not only to sell Network OSs but to also
sell applications (WordPerfect purchase) as well as an application
server (UNIX purchase) and a desktop OS (Digital DOS). Novell has
spent the past year shedding these distractions and has focused on
its core competency, the Network OS arena.
Novell is still the largest provider of network software in
the world. Based on Novell's third fiscal quarter, the company's
annualized revenue is $1.5 Billion. In the third quarter, Novell
returned after-tax profitability to 16% of revenue, which is
approximately even with the 16.6% of revenue achieved in 1995.
That places Novell in the top third of companies in the industry.
To put it in perspective, Novell's rate of profitability in 1995
was ahead of Oracle, Informix, Silicon Graphics, Sybase, Adobe,
3Com, and Sun. In the most recent quarter, Novell delivered more
than five times the revenue of Netscape. On the earnings side,
Netscape earned $528 thousand in profit, compared to Novell's
$59 million.
Novell's current situation and strategy
---------------------------------------
Novell's major strength lies in the fact that it is still
the largest provider of network software in the world, with an
installed base of over 55,000 servers. The current investment of
many corporations, along with high switching costs, does not lend
itself to an easy switch to a competitor's product. Technically,
NetWare is superior (1) to Windows NT, in aspects such as security,
performance, scalability and reliability, all aspects that are
needed for an enterprise network. Novell continues to have a
strong presence in the VAR distribution channels, providing wide
spread acceptance of its products. Also, Novell has the best
knowledge of the NOS technology within its ranks. Finally, Novell
is fiscally sound with little debt and a war chest containing
over $1 Billion.
Novell, however, has its share of weaknesses. First,
Novell's perception among customers and financial institutions
is very low. Customers are confused, skeptical and lack confidence
in Novell's ability to provide a clear path forward. Young and
Marengi, the current temporary replacements for the exodus of
Frankenberg in August, have not been able to provide strong
management and lack the ability of visionary leadership. Second,
although Novell launched a $20 million per quarter world-wide
marketing campaign, the marketing department has been unable to
get the media to focus on Novell's achievements and its technical
superiority to competitor's products. Third, the drop in revenues
and earnings this past year has continued to be detrimental to
ongoing sales as the perception of a financially sound company
affects purchasing decisions. Fourth, the company's culture
was one of consensus building, making it difficult to move quickly.
Frankenberg was indecisive and reactive (2). Flattening the
management structure and new leadership might change the culture,
but this does not happen over night. In fact, the indecision of the
board to announce a new CEO, or even provide updates on the
current search, shows that they still employ "dragging their feet"
management style. Fifth, their technology has historically
been proprietary. They have been moving to refresh their products
to adhere to the open Internet standards, but they need to complete
this transition as soon as possible.
Novell faces a few threats in the current market
environment. First, Microsoft's Windows NT Advanced Server has
made inroads in the NOS market. Second, other vendors, such as
IBM and Compaq are also entering the NOS market with their own
products. Third, Novell has been loosing talent, both technical
and managerial, to competitors who can offer more exciting and
better future-oriented environments.
The good news is that Novell has many opportunities to
capitalize upon. First, the computing paradigm shift in
corporations today to embrace the Internet and its open
standards provides Novell with the tremendous opportunity to be
the change agent for these companies. Through restructuring
NetWare into IntranetWare, Novell can increase revenues by
upgrading its NetWare 3.x installed base customers, providing
a path forward to setting up Intranets while capitalizing
their current investment. The prevailing opposition to NetWare
was its reliance on proprietary protocols. NetWare 4.11 and
IntranetWare alleviate this problem through its open architecture.
IntranetWare's open architecture will also attract new customers
who want this capability now, instead of waiting until 1998
when Microsoft will have comparable technology.
Second, Novell can leverage off the new revolution of the
Network Computer (NC) as the desktop choice among corporate LANs.
As PC desktops took more of the focus, NetWare lost some of its
impact, but as the network becomes the focus, products like
IntranetWare will become the most important components on the
network. The success of an NC environment is dependent on the
security, reliability, performance, and scalability of
the network, features in which IntranetWare excels. Corporations
looking to move to the NC model will look to maximize their
current investment, and as Novell has the dominant market share
in NOS they need to market IntranetWare as the best server
platform for the NC model.
Third, Novell's technical education programs have been
certifying industry and network professionals since 1989.
Novell certifications, including CNE, CNA and CNI, are
global standards. Novell needs to develop a new program to
satisfy the demand for training, measuring and qualifying
Internet professionals in the growing marketplace.
Fourth, Novell is the NOS vendor of choice for the
high-end enterprise network. Novell should further grow its
IntranetWare technical ability to target the mission critical
application platform. This market segment may give Novell
the opportunity to provide the platform to companies who now
face the "year-2000" problem. These companies have two
choices: patch the existing legacy systems (usually written
in COBOL, etc.) or take this as an opportunity to update and
develop new client server applications to be ready by 2000.
Those companies that are looking to update, will need to look
to Novell as the best platform for their mission critical systems.
Fifth, the Novell Embedded System Technology (NEST)
focuses on office environments and products by allowing them
to become nodes on NetWare and IntranetWare networks. By the end
of 1996, 30 manufacturers in the office arena will be shipping
close to 1 million NEST-enabled products. The NEST technology
would, for example, allow users to relay a document along with
instructions telling a copier to staple and collate the document.
Other devices to be supported in 1997 include multifunction
scanners and PBX phone switches. Novell has partnered with Ricoh
to trial this technology. Novell has also partnered with Utilicorp
to develop the NEST-enabled Powerline technology, which provides
the ability to connect networks via a utility company's power
lines. This technology might hold a promise to vastly reduce
the cost of cable installation and maintenance for a large
number of office configurations.
Sixth, the growing market for Intranet software and
services provides Novell with an opportunity to generate revenue
from a service division, which will utilize their installed
base to sell and install Novell and third-party software and
become a software integrator. They must be careful not to
alienate their current reseller base by competing with them
directly. Perhaps they can develop an on-site customer service
department where, with their reseller and other major company
alliances, they sell a new direct customer service. This
could be one stop shopping service, centralized through Novell
direct customer service division. Products and value added
services would include third party software and
hardware, MIS consulting, and annual maintenance contracts.
Seventh, Novell is looking for universal acceptance of
its Novell Directory Service (NDS) product as the standard in the
industry, making it the "universal directory". To this end, Novell
announced that it will provide royalty-free source code of NDS to
UNIX vendors and executable versions for the Windows NT platform.
Alliances have been made with IBM, Oracle, Sun, HP, and SCO to
support NDS on their platforms. This helps solidify Novell's lead
over Microsoft (not planning to deliver until 1998!) in directory
services. By positioning NDS as the universal enterprise
directory service, Novell can then sell products that leverage
off NDS, such as GroupWise and ManageWise. Novell's strategy
seems to be to make NDS as pervasive as JAVA. Part of the alliance
with Sun was the agreement that Novell will license Sun's Java
WorkShop, making it easier for programmers to develop, integrate
and run NDS-aware Java applications on IntranetWare. An easier
development environment leads to more third-party Novell
applications, which in turn leads to a wider acceptance and
demand for the IntranetWare platform.
Eighth, Novell is looking to capitalize on the future
electronic commerce market by standardizing NDS. At the heart
of electronic commerce is security, nonrepudiation, integrity,
and accessibility. Without these there cannot be an on-line
marketplace. It comes down to: if you can't find what you want
on-line in a simple way and with security and trust, then
electronic commerce will only service those comfortable with
the eccentricities of computer systems. Novell stands a good
chance of setting one of the most important standards for the
future of electronic commerce. Novell needs to leverage the
future pervasiveness of NDS and generate revenues by writing
programs that take advantage of the universal directory.
Ninth, Novell's strong cash position gives the company
tremendous flexibility. The cash should be an important factor
in investments Novell can make in technologies that are
synergistic with its network software business and with its view
toward the electronic commerce frontier. An example of a strategic
alliance or acquisition that would enhance Novell's prospects
is Verisign Inc. which makes software used to safeguard commercial
transactions on the Internet.
Suggested Additional Strategic Moves
------------------------------------
No matter how technically advanced Novell's products are
in relation to the competition, the products won't sell themselves
and can't substitute for good marketing. Novell needs to provide
incentives to VARs to encourage them to move forward with a
focused upgrade approach. If Novell does not convert their
installed NetWare 3.x accounts now, it will be difficult latter
to sell them this package as other companies enter this market
with their line of Intranet products. Novell should employ co-op
advertising and incentive sales options to VARs who solve customer
problems utilizing a Novell product or a third-party Novell
integrated application. Along with this "push" paradigm through
VARs, Novell should also move to the "pull" paradigm by
advertising to the general public similar to Lucent.
TV advertisement would help promote the company image and
generate hype. The average corporate officer should equate
"efficient, investment, low administrative cost, profit center
networking" with the name and logo of "Novell". The CFOs and COOs,
who are non-technical, should understand where and how Novell is
positioning its products for the future. Convince the centers of
influence and the keepers of the capital. The current marketing
campaign seems to be limited only to a series of press releases.
The marketing department needs to be more aggressive in enhancing
Novell's reputation.
Novell has taken the correct course in restructuring its
management and redesigning its products to prepare it for the
long range strategic direction it needs to pursue. Its stock
price has suffered, but it hopefully is in a stronger competitive
position. However, the company cannot totally disregard the short
term, and this strategy must now start to bear fruits through
increased profits so that its financial position perception among
its customers can return with confidence. Financial analysts
probably can't tell the technical difference between IntranetWare
and Windows NT, so they look to financial reports to validate their
perceptions. Novell must turn around the decline of revenue and
profits, and then the financial community will turn around on
Novell. If Novell is able to beat analysts estimates for fiscal
4Q96 (to be announced on 11/26/96), then the upward path will have
began. However, the release of IntranetWare, which lays the
foundation for Novell's forward looking strategy, was only three
weeks before the end of the quarter. Therefore, it is
imperative that Novell show strong acceptance of IntranetWare in
the next quarter (1Q97) at the latest in order to complete its
turn around to financial stability. If it cannot, then it
will be time to look for a buyout or merger with another company
that will be able to leverage Novell's technology. Possible
suitors include, IBM, Netscape, Oracle, Sun, and even Microsoft.
Finally, Novell must act quickly to announce a new CEO.
The search has already gone on too long. This person must be a
dynamic, outspoken, and well received leader, with a clear vision
of a direction for Novell, and who can clearly articulate this
vision to customers, alliance partners, VARs, and the financial
community. Without a permanent CEO the confusion and lack of
confidence will continue to weaken Novell prospects in the
future.
End Notes
---------
1. Many trade journals and analysts compare NetWare/IntranetWare
to Windows NT, with the large majority concluding that Novell
provides a better platform for the enterprise network. Some
sample excerpts follow:
- InfoWorld, September 16, 1996, Product Reviews - "[IntranetWare]
offers a host of enhancements to the NetWare core and bundles
a number of key applications and NetWare add-ons that
significanlty strengthen NetWare's position against Microsoft
Corp.'s Windows NT Server 4.0 as a more scalable network
operating system (NOS) enterprise solution" and "Novell's
toolset offers significantly more powerful configuration
options than Microsoft's." Some of the great features listed
in the article are the hardware auto detection feature and the
Abend auto recovery feature.
- The Salt Lake Tribune, November 22, 1996 - "Microsoft Corp.,
with its Windows NT software for networks, is Novell's chief
rival. But analysts, such as Peter Rubicam, of Dean Witter
Reynolds, say Microsoft hasn't matched Novell in the
enterprise network market."
2. PC Week, September 18, 1996
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Any Comments??
Thanks-
Leo |
