Teaching Note: sm-117 tn date: 07/25/05

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Teaching Note: SM-117 TN

Date: 07/25/05

Teaching Note for

BEA Systems, Inc. in 2003: Reaching for the Next Level

To become the predominant player in its industry, BEA faced several strategic challenges. IBM, Oracle, and Microsoft posed an increased competitive threat in BEA’s core application server market segment. Seeking further growth opportunities, the company was broadening its product portfolio into the integration and portal market segments where it faced strong competition from pure plays such as SeeBeyond, Vitria, Web Methods and others.

At the same time, there were increasingly strong pressures to bring all of these pieces together in an integrated “platform” that could be effectively used by corporate software developers seeking to write additional applications or better integrate existing ones, as well as by independent software developers writing major new applications. Top management felt BEA had to win the major battle for becoming the “preferred platform partner” for the high-end enterprise computing market segment. Also, a new category of Internet-based “Web services” offered the opportunity to also become a key player in the mainstream – mid-size and small company - market segment. In order to be able to effectively compete with its much larger rivals and to successfully pursue its preferred platform ambitions, top management felt that it needed to carefully formulate and implement a radically innovative product strategy combined with an equally innovative comprehensive distribution channel strategy.
In terms of the strategic dynamics framework, the case shows an example of P-controlled change which threatens to change into P-independent change.

Suggested Preparation Questions:

  1. How did Bill Coleman and his colleagues go about identifying the business opportunity for BEA Systems? What, if anything, was special about their identification efforts?

  2. What are the market and technological forces that have driven BEA System’s success since its founding and until early 2003?

  3. In 2003, what is the structure of the application server industry? What are the different product-market segments? How attractive are the different segments? Why?

  4. In 2003, what is BEA Systems’ official corporate strategy? How well are BEA Systems’ corporate strategy, product-market position in the industry, distinctive competencies, and strategic actions aligned? How do you know?

  5. Beyond 2003, what are the competitive and other strategic challenges facing BEA Systems? Who are their most dangerous competitors? Why?

  6. Beyond 2003, how can BEA Systems grow profitably to the level where they can effectively meet the competitive challenges that they face? Please prepare an action plan.

Discussion Topics

  1. Horizontal versus vertical strategies

  2. Pros and cons of being a “pure play”

  3. Growth strategy and channel strategy

  4. Competing on the “intersecting ground”

Class Plan

  1. Introduce the case

Describe the forces at play at the time BEA was founded

Describe the situation in 2003

  1. Beyond 2003, How can BEA grow to sufficient size as a pure play middleware company?

How big must they become by 2006? ($3 billion)

How big are their core markets expected to be by 2006? (SOM is not growing)

How can BEA achieve the necessary growth?

Farm or Hunt


Discuss the role of channels (SIs, ISVs, VARs)

Other growth avenues

Role of channel strategy

  1. Beyond 2003, how can BEA compete against major rivals?

IBM, Microsoft, Oracle, Sun, others?

Apply “silver bullet” test

What are the implications for BEA’s possible strategic actions?

  1. Beyond 2003, how can BEA compete or collaborate with application software vendors?

Competitive Threats? (e.g., SAP)

Collaboration Opportunities (e.g. PeopleSoft prior to its acquisition by Oracle)


It is helpful for instructors to being the session by reviewing some to the significant industry forces that were around when BEA’s founders started the company. Two the most important forces that influenced BEA’s founders were:

  • Distributed computing (the client/server model of computing)

  • Heterogeneous IT systems (companies using software and hardware products from different vendors and making them work together)

BEA co-founder Bill Coleman reported that his vision was that “the network is the computer” and this created the need for an “operating system” for such a computer: ie an application server and middleware that created interoperability. Companies faced increased complexity in the applications they were running, and BEA’s Coleman believed that, “people don’t want to give up their data.”

In the 2-Tier model of computing (client/server), the client contained the presentation logic and the business logic. In the 3-Tier model (client/ application server/server), there was a separate application server between server database and client. In this model, the application server contains the business logic.
BEA’s strategy at this time was to use an existing product (Tuxedo) to meet this identified market need. The company planned to grow through channel sales.
The Internet added a new component to BEA’s strategy. The company developed a Web-services architecture so customers could incorporate the Internet into their computing environments. As the Internet grew in importance, BEA bought WebLogic.
By 2003, how successful has BEA been?
In 2003, BEA had grown to $1 billion in revenue. It’s gross profit was $220 million and net profit was $135 million. The company enjoyed a strong reputation with developers (a vital constituency that was crucial to software packages) and achieved many success against competitors. That is not a bad record of achievement in just 6 years. However, by 2003, IBM and Oracle entered the space.
Beyond 2003, what are the key strategic challenges?
BEA’s CEO at the time of the case, Alfred Chuang thought the company would need to grow to $3 billion in revenue by 2006 in order to compete effectively in the market, given the entry of IBM and Oracle and smaller competitors.
This raises a problem for BEA. Instructors can review with students BEA’s growth trajectory as of 2003. The chart below shows BEA’s core markets in 2003, an estimate of market size in 2006, BEAs market share in 2003 and the resulting revenue. Multiplying BEA’s 2003 market share by the estimated 2006 market size reveals that BEA will be a little over halfway toward its goal of $3 billion in revenue by 2006.

Core Markets

2006 Market Size

Share of Market (2003)

Projected 2006 Revenue

Application Server

$4.4 billion


$1.3 billion

Application Integration

$4.9 billion


$0.1 billion

Application Portal

$3.1 billion


$0.3 billion


$12.4 billion

$1.7 billion

Instructors can use this as a launching point into a discussion of avenues of growth for BEA. What are the company’s growth options?

In general, BEA seems to have a few avenues for growth:

  • Market penetration: go deeper in its current industries (e.g., serve large companies in finance and telecoms). Developing a “Hunting” (capture new clients) and/or “Farming” (increase share of wallet from existing clients) salesforce.

  • Market development: serve other industries (e.g., manufacturing, retail, pharmaceuticals, transportation); serve small and medium businesses (with a lower cost product such as WebLogic Express)

  • Product development: e.g., expand Web services.

  • Diversification?

  • Forward integration: add applications (but be careful not to compete with customers; add services (but don’t just imitate IBM)

  • Backward integration: run databases for companies.

As instructors review these and other options, it is helpful to review the role of BEA’s channel strategy at the time of the case. BEA used both direct and indirect channels. By 2003:

Direct: 31% of revenue

Indirect: 69% of revenue

Instructors should keep in mind that it is very difficult to scale a direct sales force. As mentioned on p. 19 of the case, BEA had 530 direct sales people. This force can cover around 2,500 accounts effectively. BEA may not have the resources to greatly increase the direct salesforce.
The indirect channel could be a source of revenue growth for the company. This would include working with more system integrators and consultants, platform companies, application service providers and distributors (value added resellers).

In addition, some analysts estimated that 70 percent of application server technology would be bundled by independent software vendors by 2006 (see page 22 of the case), which if true, would create another force that BEA would have to deal with. BEA’s CEO Chuang says BEA needs “proliferation,” but the company is constrained in how it can achieve this proliferation.

Beyond 2003, who are BEA’s likely competitors and how can the company compete effectively?

IBM can add the applications server as part of the total solution, which would enable the the company to cross-subsidize the product and possibly underprice BEA.

However, customers would be locked-in, and development of new products could slow because of the need to develop for different source codes. In addition, IBM faces possible dissonance between software and services groups and the company is not focused on small and medium accounts.

Microsoft≡Ease of use and low price

Microsoft could integrate an application into the operating system.
However, customers would face strong lock-in. In addition, Microsoft’s direct sales force is still relatively undeveloped. Finally, ISVs would likely resist the company’s entry.
For Oracle, the database is key.
The company is pursuing a vertical strategy which threatens key players in the existing industry structure.
BEA≡Reliablity, ease of use and good economics
BEA is a pure play with few conflicts with other industry layers.
However, the company offers no database product, SAP is moving into application s servers. BEA seems to be caught in the “intersecting ground” of its shifting industry.

BEA Systems, Inc. in 2003 Summary By Robert A. Burgelman
1. Sometimes a start-up company’s strategic opportunity can be effectively pursued by buying an existing technology or product (or company) rather than through de novo technology or product development. BEA’s acquisition of Tuxedo and WebLogic are examples. This also helps the new company to be fast in pursuing the opportunity.
2. But this requires a keen understanding of emerging market needs that extends beyond that of the current owners of the technology or product. Bill Coleman’s vision of “an operating system for the network” (to cope with increased heterogeneity) and “applications must go to the data,” provided the basis for such market-focused strategy.
3. In order to compete effectively against other major players, a start-up company needs to get to a minimum size fast. This is especially the case in the enterprise software market where BEA occupies the “intersecting ground” (Tun-Tzu, The Art of War) between very powerful forces (IBM, Oracle, Microsoft). This helps explain why BEA felt that it needed to grow from $1B in revenues in 2003 to at least $3B by 2006.
4. A growth strategy can be expressed in terms of horizontal and vertical growth vectors. Horizontal growth vectors include: (1) market penetration (with existing products in existing markets), (2) market development (existing products in new markets), product development (new products in existing markets), and (4) diversification (new products in new markets. Vertical growth vectors include: (1) backward integration and (2) forward integration). Exiting from some product-markets is part of the growth strategy because it frees up resources for redeployment elsewhere.
5. To achieve rapid growth, a company usually cannot rely only on its direct sales force but needs to develop an indirect channel strategy. BEA’s 500 direct sales people, for instance, could perhaps cover 2,500 accounts out of the company’s 13,000 customers in 2003. An explicit channel strategy is an essential part of the company’s growth strategy.
6. Indirect channel partners include, among others, (1) System Integrators (SI), (2) Value Added Resellers (VAR), (3) Independent Software Vendors (ISV), and (4) Original Equipment Manufacturers (OEM). Each of these poses strategic challenges (e.g., early market penetration versus account control), managerial challenges (e.g., aligning incentives and retaining “mind share”), and risks (e.g., recruiting incompetent partners).
7. It is important to realize that distribution channels will not usually create demand; they need to be viewed as a potential force multiplier for the company’s clearly articulated growth strategy. Strong channels complement strong product development.
8. With the application server being viewed by the major infrastructure players (IBM, Oracle, Microsoft) as well as application vendors (e.g., SAP) as a strategic “control point,” BEA faces the challenge of capitalizing on its focused strategy to keep ahead of its less focused rivals. It needs a strong channel strategy combined with strengthening the application server with security, integration, and management capabilities to do so.

9. Others?

This note was prepared by Professor Robert A. Burgelman and Philip E. Meza for the sole purpose of aiding classroom instructors in the use of BEA Systems, Inc. in 2003: Reaching for the Next Level, GSB No. SM-117. It provides analysis and questions that are intended to present alternative approaches to deepening students’ comprehension of the business issues presented in the case and to energize classroom discussion.

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