Adobe Systems to Not Introduce “Suite” Software Product
Case Type: new product; operations strategy.
Consulting Firm: KPMG Strategy second round job interview.
Industry Coverage: software, information technology (IT).
Case Interview Question #00548: Your client Adobe Systems Incorporated (NASDA: ADBE) is a large multinational computer software company founded in 1982 and headquartered in San Jose, California, United States. The company has historically focused upon the creation of multimedia and creativity software products, 
with a more-recent foray towards rich Internet application software development. Currently the company makes photo editing, web design, video editing, and desktop publishing software.
The client Adobe Systems has historically been the market leader in two of the four software product categories (photo editing and desktop publishing). Its software products in the other two categories (web design and video editing), however, are newer and have failed to achieve significant market share so far.
The company has traditionally sold its four point products separately. Recently the CEO of Adobe is considering introducing a new business model where customers can purchase an integrated “Suite” of the four products for $1,000. Furthermore, it will raise the prices of the products in the two categories it dominates (photo editing and desktop publishing) to motivate customers to purchase the Suite instead.
Adobe conducted a concept test on the Suite product, and would like your assistance in deciding whether to go forward with the Suite product launch. Case Part #1: Will the proposed “Suite” strategy increase company profitability or not?
Additional Information:
Exhibit 1: Results of Concept Test – Customer preference shares (Show Exhibit 1 to the candidate up front)
| Software Category | Photo Editing | Web Design | Video Editing | Desktop Publishing |
| Customers who will purchase the Suite | 75% | 70% | 70% | 40% |
| Customers who will purchase only the point product | 20% | 30% | 30% | 50% |
| Customers who balk | 5% | 10% |
Note: customer overlap
- Of the desktop publishing customers who chose to purchase the Suite, 50% would have also bought photo editing software.
- All of the web design customers who chose to purchase the Suite would have bought photo editing software as well.
- All of the video editing customers who chose to purchase the Suite would have bought photo editing software as well.
Instruction to Interviewer: Once the candidate has asked appropriate questions and layed out a logical framework to the first three exhibits, ask him/her to calculate the profitability of this strategy based on the results of the concept test.
Caveat: Don’t worry about upgrades or software lifecycles, assume all customers buy full versions of the product.
Possible Answers:
Profitability Analysis
1. Question: What are the current prices of each of the four products, and how will they change in the new business model?
Answer: See Exhibit 2. Interpretation: the increased pricing of photo editing and desktop publishing products may motivate some customers to buy the Suite instead, but also may cause some customers to balk.
2. Question: How many customers will upsell to the Suite?
Answer: See Exhibit 1.
3. Question: How many customers will the company lose because of the increased prices for the photo editing and desktop publishing products?
Answer: See Exhibit 1.
4. Question: Will the company capture any new customers who will purchase the Suite who would not have purchased any point products?
Answer: Assume that all Suite customers are upsold from point products.
5. Question: What are the variable costs of producing each of the products?
Answer: See Exhibit 2. Interpretation: the photo editing and desktop publishing products yield the most profitability, but the new Suite will also be fairly profitable
6. Question: Are there additional fixed costs that the company will incur to launch the new product?
Answer: Assume that additional fixed costs and synergies gained from the product strategy are a wash in the short term.
7. Question: How many units of each product does the company sell?
Answer: See Exhibit 3.
Calculations for Base Case Scenario
| Software Category | Photo Editing | Web Design | Video Editing | Desktop Publishing | Total |
| Base case units | 600,000 | 200,000 | 200,000 | 800,000 | |
| Price per unit | $600 | $300 | $500 | $500 | |
| Revenue | $360 M | $60 M | $100 M | $400 M | $920 M |
| Costs per unit | $60 | $90 | $125 | $100 | |
| Profits | $324 M | $42 M | $75 M | $320 M | $761 M |
Calculations for Suite Scenario
| Software Category | Photo Editing | Web Design | Video Editing | Desktop Publishing | Suite | Total | |
| Balkers | -30,000 | 0 | 0 | -80,000 | 0 | ||
| Upsell | -450,000 | -140,000 | -140,000 | -320,000 | 1,050,000 | ||
| Overlap | -440,000 | ||||||
| Revised Units | 120,000 | 60,000 | 60,000 | 400,000 | 610,000 | ||
| Price per unit | $700 | $300 | $500 | $600 | $1,000 | ||
| Revenue | $84 M | $18 M | $30 M | $240 M | $610 M | $982 M | |
| Costs per unit | $60 | $90 | $125 | $100 | $250 | ||
| Profits | $76.8 M | $12.6 M | $22.5 M | $200 M | $457.5 M | $769.4 M |
A good answer to the analysis is that although the Suite strategy is slightly more profitable than the status quo ($769.4 M vs. $761 M), it’s not a clear winner. An outstanding candidate will easily grasp the impact of cannibalization and price increases on the product mix.
Case Part #2: Start by giving answer to Case Part #1 if the candidate did not calculate correctly. Background: It appears that there is marginal upside for the company in pursuing the Suite strategy from a near-term profitability standpoint. Question: What are some additional long-term factors that the company should consider to make a decision on the Suite strategy?
Possible Answers:
Do a market opportunity analysis.
1. Question: Examine growth, market share, and size of each category.
Answer: See Exhibit 3. Interpretation: the newer categories represent significant market opportunities in terms of both size and growth.
2. Question: What is the overlap between customers in each category?
Answer: Almost all customers own products from at least three of the four software categories when you include their ownership of competitive products. The majority of our client’s customers own competitive products in the web design and video editing categories.
3. Question: Will customers actually adopt the video editing and web design software as a result of owning the Suite if they were previously using competitive products?
Answer: Research shows that after customers who own our client’s market leading software products and try the company’s video editing and web design software products will switch from competitors 75% of the time.
4. Question: What does the competition look like in the video editing and web design markets?
Answer: Both categories are currently fragmented by numerous small companies.
Based on the direction of market growth, it is imperative that the company gain success with its newer products in order to maintain long-term growth. Given the high amount of customer overlap, it is probably wise for the company to leverage its current market leadership in the photo editing and desktop publishing categories.