Some of my colleagues in Enterprise Ireland were debating the other day an ongoing SaaS issue – whether it is an all or nothing business model or can you run your old on-premise business hand-in-hand with your new SaaS business, i.e. a ‘Hybrid Model’.   Salesforce.com and other SaaS zealots go for the purity of SaaS only and see the hybrid model as a bastardisation that will ruin both businesses.   The issue I think is more fundamental than alternative ways of applying technology, it is about leveraging your company’s strategic strengths through the key generic strategies of cost leadership or differentiation.

A company using a cost leadership strategy sells its products at average industry prices (i.e. Google) to earn a profit higher than that of rivals, or below the average industry prices to gain market share (i.e. Salesforce.com).

A differentiation strategy is based on selling a product or service that offers unique attributes that are valued by customers and that are perceived to be better than or different from the products of the competition.   The value added by the uniqueness of the product or service should allow the firm to charge a premium price for it.   The hope is that the higher price will more than cover the extra costs incurred in offering the unique product.

The fact is that for many software companies the uniqueness is not there or it is presented poorly and the customer doesn’t appreciate or understand it.  This is reflected in the high level of software companies that never brake through the €1m barrier.

So this brings me to Michael Porter’s (Professor at Harvard Business School) thesis that firms utilising a combination of generic strategies end up “Stuck in the Middle” and eventually fail.   If a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost leader.   Even if the quality does not suffer, the firm risks projecting a confusing image.   For this reason Porter argues that to be successful over the long-term, a firm must select only one generic strategy.   Otherwise, with more than one single generic strategy the firm will be “Stuck in the Middle” and will not achieve a competitive advantage.

Porter argues that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy.   By separating the strategies into different business units, having different policies and even different cultures, a corporation is less likely to become “Stuck in the Middle”.

There are, however, two sides to every argument.   Some argue that a single generic strategy is not always best because within the same product customers may look for a different level of offering.   Some also argue that a hybrid strategy may become even more important – and more popular – as global competition increases.   Compared to companies relying on a single generic strategy, companies that ingrate generic strategies may position themselves to improve their ability to adapt quickly to environmental changes and thereby learn new technologies and skills.   This could more effectively leverage core competencies across business units and product lines and can also help produce products with differentiated features or characteristics that customers will value.   The premise is that Differentiation enables the company to charge a premium price and Cost Leadership enables the company to charge the lowest competitive price.   Thus, the company is able to achieve a competitive advantage by delivering value to customers based on both product features and low price.

To be honest I don’t fully buy into the hybrid model.   If you are selling the Salesforce.com $50 per month per client model then you have to be conscious of all and every cost factor.   A few extra telephone calls could eek into your profit.   Alternatively, if you are selling a sophisticated, expensive, on-premise software then your pricing needs to take into account sufficient overheads to cover the cost of multiple visits to your client, if required, in order to secure the contract.   Building and selling a traditional software product is fundamentally different than delivering and supporting a SaaS solution.   Supporting these two different models can create internal cost issues and external conflicts which are costly, inefficient and in the long-term doomed to failure.

I may, however, have to eat my words.  It is only just a month since Google announced that “Offline Gmail” was leaving the Gmail Labs testing area and will be implemented as a standard feature for all users.  So you can now have your Gmail on-premise and in the Cloud.  But since most people don’t generally pay for Gmail maybe the standard strategic analysis doesn’t stand up.

The bottom line in strategy is that business success is measured “long-term” and SaaS, despite being around ten years, is still very much current.

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