Balance the Books and Slay a Giant

Volume 3 Letter 10

It was 1982 and Scott Cook was sitting at his kitchen table when his wife started complaining about balancing her check book. Personal computers were still somewhat of a novelty and people were looking for other applications besides word processing and spread sheets. It occurred to Scott that a software package that would assist people with their check writing and account balancing might fly.

In 1983 Scott Cook quit his job as a consultant and founded Intuit and created the first software package that assisted people with their personal finances. The software became an instant success and a market leader. However in the software industry success seems to trigger an attack button at Microsoft and Scott Cook’s start up was no exception.

Microsoft’s marketing knocked out other market leaders. Some of the more high profile names include WordPerfect, Lotus 123 and more recently Netscape. Quicken faced its threat back in 1991 when Microsoft entered the market with MS Money.

In Intuit’s favour was the fact that most people hate changing programs. However at that time people were changing operating systems (from Dos to Windows) and Intuit badly needed a version that would run in Windows. Microsoft would definitely be first to market with their Windows version of Money.

To counter act Microsoft’s first in advantage Intuit developed an excellent strategy that caught Microsoft off guard. First Intuit pre-announced that its Windows version of Quicken would be released. This had the effect of making some in the market wait.

Inuit also offered distributors a $15 rebate coupon (paid to the distributor not the customer) that was redeemed when Intuit software was purchased in their store. This was the first time anyone offered any added incentive to retailers for selling their software.

Another significant move that Intuit made was to wait and see what the price of MS Money was going to be before setting their price. Intuit then set a lower retail price for Quicken. If Quicken was a new product this could signal inferior quality but since Quicken was already established and known, retailers felt Money was overpriced.

Finally Intuit set a significantly lower dealer price for Quicken and on top of that offered retailers deep discounts for bulk orders. The retailers appreciated the opportunity to earn more margin and they advised customers to wait for the new Windows version of Quicken. The net result was Intuit effectively stalled Microsoft’s Money entry into the marketplace and bought themselves the needed time to develop their Windows version of Quicken.

Realizing that Money wasn’t penetrating the market as fast as they forecast Microsoft reacted by lowering the price. However, knee-jerk reactions are often are based on superficial evidence and this was no exception. Microsoft wasn’t seeing the whole picture. The true battle for market share wasn’t only taking place at the cash register it was also taking place at the distributor’s margin. When Microsoft lowered their retail price, they forgot to lower their distributors’ price, leaving the distributors with very little margin. As other newsletters have pointed out taking care of one customer in the distribution chain while upsetting another is bad news. Upset distributors were not inclined to push the MS Money product.

Money still survives today but Quicken holds a commanding 70% market share. Intuit has also beaten back Microsoft in the small business market with its product QuickBooks and in 2000 Microsoft exited the tax planning market shelving their Tax Saver software as they conceding defeat to Intuit’s Turbo Tax program.

Microsoft even tried to purchase Intuit in 1994 but backed off when it looked like they would be sued by the Justice Department for trying to limit competition.

It’s tough to take on a giant but if one must:

1. Focus your resources on key points in the market where they can be most effective – in this case it was with the distributors.

2. Keep your focus on your customer – Intuit kept improving Quicken for the customer and distributors while other Microsoft competitors (Netscape, Lotus 123 and WordPerfect) became obsessed with beating Microsoft.

3. Buy time: Intuit announced when their Windows version of Quicken would be launched and its price, effectively stalling MS Money’s entry into the market.

4. Look beyond the obvious: many companies when attacked get mad and react without thinking through their strategy – in this case it was Microsoft who reacted by lowering their retail price further squeezing distributor margins.

5. Know your competitor’s strengths and weaknesses – remember in a competitive market, strategy is about bringing one’s strengths to bear on an opponent’s weaknesses.

Being a giant doesn’t make one invincible. To a good business strategist it just makes the fight more interesting. After building a company from his kitchen table in 1982 and eating Microsoft for lunch, one must wonder what Scott Cook is preparing for dinner?

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For the full story please see “Inside Intuit”, Suzanne Taylor and Kathy Schroeder.
Additional info on http://knowledge.wharton.upenn.edu under leadership and change.

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