Thursday, March 11, 2004

Lower Costs or Lowest Cost


San Francisco State University

The strategic logic of cost leadership usually requires that a firm be the cost leader, not one of several firms vying for this position. Many firms have made serious strategic errors by failing to recognize this. When there is more than one aspiring cost leader, rivalry among them is usually fierce (Porter 1998)…

In the analysis of the opensource debate, I have taken a strategic business perspective utilizing Porter’s Competitive Strategy (1998) to argue that diffusion is at the mercy of forces that the techies cannot control alone. The first assumption is that opensource competes in the larger market that contains all software, and is vying for the same market share as all other open and closedsource products and services. In addition, I’ve assumed that opensource is an internal business strategy as opposed to a way of programming. With this said, let’s take a look at opensource under Porter’s strategic model from the perspective techie, customer and business.

From the perspective of opensource as the cost leader in the software market, techies have failed to unite to become “the” cost leader. Often times, the idea of low cost leader is stereotyped as the lowest price, in this case free, but really that is not the case according to Porter. The low cost leader is the one organization, in this case the one group of opensource techies, that can produce opensource with the lowest human resource, service, time and delivery costs. Unfortunately, techies have not banded together to form the low cost leader, and have decided to unite in fragmented groups against a common competitor (Microsoft) rather than unite to lower costs. This opportunity cannot be ignored if techies wish to diffuse, develop and utilize opensource products. The most important finding in Porter’s strategies is that techies can utilize, is that they cannot become the low cost leader and pursue differentiation at the same time. According to Porter’s theory, the argument for opensource being better or higher quality or more secure is quickly shot down under the assumption that opensource has always pursued Porter’s (1998) Cost Leadership strategy.

Cost leadership is perhaps the clearest of the three generic strategies. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale and proprietary technology. Low-cost producers typically deliver a standard, or no-frills, product. If a firm can achieve and sustain overall cost leadership, then it will be an above-average performer (Porter 1998).

Opensource meets all of these criteria and Apache is a great example of the low-cost above average performer in web-server software, that techies developed through a low-cost model of integrating patches of code together to form one functional piece of software (Verma 2004). Furthermore, it could be argued that Apache was developed more on the side of customer and business needs as opposed to an anti-Microsoft stance, strengthening the argument that opensource has dabbled in the low-costs strategic arena, but techies have failed to pursue the business strategy 100%. Is Apache better? Maybe or maybe not, but was its development team “the” low-cost leader, I argue a resounding yes!

Since techies will probably count their hours of coding as free labor, opensource will always be a low-cost leader, but will all opensource techies as a group become “the” low cost leader? No, but if techies decide to segment the market along strategic low-cost product lines, they may be able to avoid Porter’s warning of fierce rivalry. Otherwise, I expect the battle between lower-cost software and differentiated software to continue at the same time techies continue to eat each other’s lunches, while Microsoft, Apple and others bring clearly defined and differentiated products to customers and businesses.

Customers want utility and will turn away from confusion. Opensource cannot differentiate itself if it pusues the low-cost leader strategy. Porter explained that “usually a firm must make a choice between low-cost, differentiation or focus, or it will become stuck in the middle.” So under the assumption that opensource will always be free, it cannot avoid the low-cost pursuit, and it also means that customers will never choose opensource for differentiation. So in the value chain, the confusion around opensource actually strengthens Microsoft and other clearly differentiated products. Again, opensource is eating its own lunch by being “stuck in the middle (Porter 1998).” Since opensource provides low-cost to the value chain, any energy focused on differentiation moves opensource towards the middle.

Businesses are even a bigger customer in the value chain. Although a business could be argued as a group of techies developing opensource, the real value in the chain is that businesses can choose to utilize opensource over a differentiated product. A great example would be a business going into e-commerce choosing between Apache and Windows Server. Apache is the low-cost leader and Windows Server is the differentiated product. Businesses know that if they choose Apache, they will have to service the product themselves, because it is not unique. It can be argued that if they chose Windows, they actually have a unique service that adds value into the chain. Regardless of the technical argument against Microsoft or other differentiators such as Oracle, “in a differentiated strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It is rewarded for its uniqueness with a premium price (Porter 1998).” Unfortunately, some techies may have confused unique with better. Whether or not Oracle or Microsoft products are better is irrelevant according to Porter. Better is not necessarily unique and differentiated. What’s important is that closed source software is. It’s almost always trademarked, patentened and branded as a unique product that provides value in a very clear and specific way. Opensource software has none of these business characteristics. For this reason, businesses will choose opensource for low-cost and closed source for uniqueness. Luckily, flexibility and customization are components of open source that don’t always contribute to uniqueness, so they’re attributes that can add value to the low-cost strategy. Red Hat’s service is a great example of adding value the low-cost business Linux (Verma 2004)

So if The Opensource Initiative can utilize a low-cost Porter model that stresses the low-costs strategy coupled to value added services such as the non-unique factors that attract closedsource users, opensource could segment its market further. Until opensource realizes its competing with itself, Porter’s theories have showed it’s stuck in the middle of fierce competition. The result has been volatile products and market share. Opensource business strategists might want to take a good hard look at Apache and determine whether or not its success was due to being the low-cost leader and not unique or better.


Open Source. Short essay 1: the opensource initiative;; accessed February, 2004.

Open Source. Open source case for customers;; accessed February, 2004.

Open Source. Open source case for business;; accessed February, 2004.

Open Source. Open source case for hackers;; accessed February, 2004.

Porter, M. 1998. Competitive Strategy. In B. de Wit & R. Meyer (Eds.), Strategy: Process, Content, Context: 344-358. London, UK: Thomson Learning.

Verma, S. 2004. Seminar in advanced computing applications for management – lectures. San Francisco, CA: San Francisco State University.

Written by John Acheson in 2004 before Web 2.0 i.e. the rise of Google (search), MySpace (community), YouTube (pull), etc. as part of an A earned in SEMINAR IN ADVANCED COMPUTING APPLICATIONS FOR MANAGEMENT

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