Learn from IBM’s success in securing high value in a commodity disk drive market

In the mid 1990’s, the opportunity facing IBM was how to secure value for a dramatically superior disk drive given limited supply. Adopting IBM’s product would challenge the multiple source strategy prevalent in the market.

Disk drives used for PC’s were the lowest margin and largest volume segment in the drive market. OEM customers placed orders with 3-5 vendors for flexibility and continuity of supply in an unpredictable market. The OEM customer also asserted the attributes of the disk drive did not factor into the user’s purchase decision. Price was the top criteria used to determine how a quarterly purchase was split across the selected drive companies.

Prudent risk management by the OEM customer avoided sole source agreements; protecting against supply interruption and driving a commodity decision. This strategy drove disk drive companies to develop look-alike designs, increasing commoditization and allowing transparent interchange between drive vendors by the customer. Competitive advantage for a disk drive company was: time to market, manufacturing volumes, price, quality, and lastly performance.

Leveraging innovation, IBM developed a disk drive for PC’s with twice the capacity and 40% more performance compared to all competition.¬†IBM’s manufacturing capability was small relative to overall PC disk drive demand.

Focusing on the user, IBM established an outside-in approach to develop an integrated marketing and sales strategy. The key actions implemented are as follows:

  • Identify segments of users who value high performance and high capacity disk drives in a PC.
  • Develop marketing and sales information focused on the needs of the user, educating how a disk drive can add value.
  • Educate the OEM about segments of users who buy on capability, not on price.
  • Develop and deploy user awareness and education programs to create demand for the IBM disk drive.

The results were unprecedented. In the battle for the high end PC buyer, which brings higher margins and more revenue, the OEM customer changed strategy. OEM customers made sole source decisions to secure the IBM disk drives: exclusively placing them in PC’s targeting performance and power users. Market demand exceeded IBM supply and prices were based upon perceived value, not historical price points. The other drive suppliers were relegated to sell mid and low capacity disk drives to meet the needs of the mainstream PC market.

Industry analysts concluded almost all of the PC disk drive segment profit flowed to IBM for several drive generations.

Under my leadership, the IBM OEM organization invested in developing and driving an integrated marketing and sales strategy focused on users who value high performance and high capacity disk drives. It was an unqualified business success. At the onset,  outsiders predicted failure.