Software Firm VMware to Set Up Engineering Unit in India

Case Type: operations strategy, outsourcing; market entry.
Consulting Firm: Gallup Consulting 2nd round full time job interview.
Industry Coverage: software, information technology (IT).

Case Interview Question #00657: The client VMware, Inc. (NYSE: VMW) is an American software company that provides cloud and virtualization software and services to both personal and corporate customers. The company’s desktop software runs on Microsoft Windows, Linux, and Mac OS X, while VMware’s enterprise software hypervisors run directly on server hardware without requiring an additional underlying operating system.

VMware has its headquarters in Palo Alto, California, United States, and established an R&D Center in Cambridge, Massachusetts, as well as one at the Time Warner Center in New York City. Recently, the Chairman of VMware wants to offshore/outsource its engineering and designing unit to India, as well as to penetrate into the India software engineering market. Should they do it? Why or why not?

Additional Information: (to be given to candidate upon request)

The candidate is supposed to figure out the following information by asking appropriate questions. The interviewer is supposed to read this information well before he/she gives the case. The interview style should be pleasant but reserved.

1. Market Share — in the US the client VMware is the industry leader in cloud service and virtualization software with several close followers chasing behind.

2. Profitability — profitability is declining (unknown reason, but increasing labor costs can be a reasonable assumption).

3. Capability — VMware has strong engineering department in the US.

4. Cost — R&D is the major cost and Indian software engineers are estimated to be only 1/4 of the cost of the US engineers with the same technical capability.

5. Customer

• The client VMware has a strong existing customer base in the US.
• Customers care about the quality of service, but are also considering lowering cost in the long run.

6. Competitions

• Competition — US:
  • Key US competitors (Microsoft, IBM, Oracle, HP, Google, etc) are all off-shoring in order to lower the R&D cost.
• Competition — International:
  • The growth of the international market is impressive compared to the more mature and stable US market.
  • Key competitors are expanding their international business aggressively.
  • India is one of the fastest growing international markets as well as the one with the largest market size.

Possible Solution:

Since the goal of this “market entry” case is two-fold, a good candidate will begin with laying out a clear scope and then gather relevant information to analyze the situation. A decision matrix can be created to guide the analysis.

Once the candidate has gathered the necessary information regarding VMware’s customers, a strong candidate should follow up with additional questions about Customer Segmentation.

It turns out most of VMware’s clients are medium to large companies in the US.

• The most profitable clients are large companies in developed countries where VMware already has a strong base.
• Currently, VMware doesn’t have any international presence yet.

At this point, a strong candidate will get the hint that entering the international market, especially the India market, is critical for the client company to both fulfill current customer’s emerging needs of cost saving and grow its future business. The candidate should then start to compare the competitive advantages between large US companies off-shoring and local Indian players.

An outstanding candidate will summarize his/her findings and make a final “Go / No go” recommendation.

Conclusion

Based on the above analysis, the short answer is “Yes”, the client VMware should outsource its engineering/designing unit to India. The situation falls into the upper left corner of the matrix because:

• In the long-run, even current customers with established relationship will need to look for cheaper alternatives. VMware can offshore its R&D to lower the cost but still keeps its customer service team in the US to maintain the high service quality.
• Although clients in the developed countries are more profitable, the actual growth of the market is limited. Developing markets like India might not be as profitable as the US, but with the huge and growing market size, even capturing a small percentage of the market can provide substantial profits.
• VMware might lack knowledge of the Indian market, but its strong customer relationship management skills, large existing customer bass, and the understating of unique customer needs can be further leveraged in India. In addition, hiring local talent or partnering with local companies can help solve the concern of the lack of local knowledge.
• The legal risk as well as the political risk in India can be considered very low.