Dissecting the Microsoft Supply Chain Announcement

Welcome to the 109th edition of The LogTech Letter. TLL is a weekly look at the impact technology is having on the world of global and domestic logistics. Last week, I explained why being annoyed by a piece of software is a good sign you’re reliant on that software. This week, guest contributor Jonah McIntire of Transporeon breaks down Microsoft’s recent supply chain management software announcement.

As a reminder, this is the place to turn on Fridays for quick reflection on a dynamic, software category, or specific company that’s on my mind. You’ll also find a collection of links to stories, videos and podcasts from me, my colleagues at the Journal of Commerce, and other analysis I find interesting.

For those that don’t know me, I’m Eric Johnson, senior technology editor at the Journal of Commerce and JOC.com. I can be reached at eric.johnson@spglobal.com or on Twitter at @LogTechEric.

Note: Jonah McIntire returns as a LogTech Letter contributor to tackle the significance of Microsoft’s supply chain platform announcement for this pre-holiday newsletter. Happy Thanksgiving to everyone in the US! We’ll be back next Friday.

On Nov. 14 Microsoft kicked off a marketing campaign for a new Supply Chain Platform. Readers of this newsletter are probably their target audience, so we’re going to give you a head start and analyze what this is about. Since I watch for any new supply chain software, I figured I’d share how I go about assessing something like Microsoft’s announcement.

Great businesses need two sequential innovations: product-market fit, followed by business strategy that delivers sustained higher margins. The first creates a product (solution, service, etc.) that meets one of society’s unmet needs. The second ensures competitors cannot just follow and arbitrage away the innovator’s margins. To check for these things, I first look at the product, then at the business model. In a final third step, I try to estimate their chance of success, since even great innovations with good business strategy can face existential risks beyond their control.

Step one: what is Microsoft’s product? Their announcements, teaser video, and solution web pages make it clear this isn’t about entering one of the well-defined software categories (WMS, inventory planning, demand forecasting, TMS, and so forth). Rather, their ambition seems to be to sell mostly existing software and professional services via spicing up the go-to-market activity around a use case (supply chain management). Another way to say it is like this: tools like Teams, Dynamics 365, Azure, and Power BI could already be stitched together to reduce problems in supply chain management. But if you weren’t creative or interested enough to do it, now there will be prebuilt playbooks, commercial references, or imprimaturs of approval for doing so from Microsoft and their system implementation providers (Accenture, KPMG, EY, PwC, etc).

I think (hope) that there is some true net-new module or functionality that is in the mix. But after a week of looking, it sure isn’t jumping out at me. For example, checking the Supply Chain Platform page in detail, you’d notice that every single capability and supply chain product is in fact an existing product (or partner’s product) that has simply been described as applicable to supply chain management. So, I think, in summary, I’d say they didn’t innovate a new product at all. Instead, they innovated a marketing or go-to-market theme to sell more of their existing enterprise tools by making them easier to picture as applied to supply chain problems.

Second, what gives Microsoft an ability to sustain higher margins in this new line of business? I’d say Microsoft brings three strategies to this domain: brand, scale economies, and switching costs. The brand aspect may be surprising in that Microsoft is not well regarded for supply chain solutions (i.e. if your life depended on it you’d pick BlueYonder over Microsoft for any big supply chain software category). But don’t overlook their brand power with the larger business leadership of their target customers (especially CIOs) and their ability to compete on brand with mid- and lower-tier software vendors. Same game again: your life depends on choosing between Microsoft or start-up Pelico? Microsoft’s scale economies are also a means of sustained margin advantage via their ability to leverage sales investments. Specifically, they can invest more into achieving a single new logo on the basis that they have more solution footprint to sell to their logo after it is won. Their ability to cross and upsell ensures different (and favorable) economics for new customer acquisition. In time this means they earn more revenue against comparable sales costs, and hence higher sustained margins compared to smaller-footprint supply chain software vendors. Even BlueYonder won’t achieve a similar average revenue per customer.

Finally, and most importantly, Microsoft’s higher margins will derive from switching costs. The switching cost strategy for a software vendor works as follows: achieve lock-in, then execute cross or upsells (or maybe just renewals) while charging more than a comparable point solution. Since the customer must add the switching cost to the actual point solution cost, the more expensive “integrated” solution wins against the point solution. See also Salesforce, SAP, and… Microsoft. See that, I surprised you! This supply chain foray isn’t even a new strategy, it is a continuation of an existing commercial strategy based on switching costs. After all, who really is going to hire KPMG to stitch together PowerBI into an Azure service that shows data from Microsoft Dynamics inventory planning and triggers alerts to groups of employees in Teams? Only an existing customer of Microsoft.

Third, is this likely to succeed? The bull case isn’t a hockey stick of revenue growth since the approach is really about incremental cross and upselling of existing products and services. But since it makes no real risky assumptions, it seems solidly likely to produce some lift in demand. The bear case is simply that telling the world “You know, these tools we built years ago could also be used for supply chain management” isn’t paying enough credit to the sophistication and maturity of existing solutions. Supply chain visibility is an example the Microsoft marketing materials focus on, and guess what supply chain professionals have already heard for decades? Stuff like this:

“Businesses are dealing with petabytes of data spread across legacy systems, ERP, supply chain management and point solutions, resulting in a fragmented view of the supply chain,” said Charles Lamanna, corporate vice president, Microsoft Business Applications and Platform. “Supply chain agility and resilience are directly tied to how well organizations connect and orchestrate their data across all relevant systems.”

Taken together I’d summarize Microsoft’s supply chain platform announcement this way:

1.     Microsoft has a bunch of enterprise software tools for BI, data exchange, messaging, and even mid-tier ERP.

2.     They’ll cross and upsell it easier if they can paint a clear picture of how to use it. After all, they are generic tools that need to be applied to be useful.

3.     For the people already (mired) in the Microsoft system landscape, this will be a bit easier than getting point solutions. If your tech acquisition is optimizing for internal IT convenience, this is for you. 

4.     Within its limited ambitions, I’d bet it works. But it’s not making the pie noticeably smaller for the rest of the software vendors.

TPMTech Spotlight

The TPMTech program is taking shape, with loads more updates to come in the next couple weeks, including a second track of sessions and TPMDevCon. One of the sessions I’m most excited about is a one-on-one conversation between S&P Global Vice President/TPM Chair Peter Tirschwell and Marc Dragon, managing director of Singapore-based Reefknot Investments. Register here for TPMTech. New registrants can get 25 percent off TPMTech, TPM23, or TPM/TPMTech bundle passes using the code EJTPM25.

Neal Peart Lyrics of the Week

The trouble with the Maples
(And they’re quite convinced they’re right)
They say the Oaks are just too lofty
And they grab up all the light
But the Oaks can’t help their feelings
If they like the way they’re made
And they wonder why the Maples
Can’t be happy in their shade?

Some upcoming events I’ll be involved in:

• If you missed my conversation with Maersk Growth Managing Partner Shereen Zarkani, you can catch the on-demand version here.

• I’ll be joining a Container xChange webcast on what 2023 holds in the container shipping industry at 7 am ET Dec 8. More details here on how to register for the free event.

Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or S&P Global, and any opinions are mine only.