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9B12A020

DATAVAST INC.: THE TARGET SEGMENT DECISION

Maggie Hao wrote this case under the supervision of Professor Michael Taylor solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
Copyright © 2012, Richard Ivey School of Business Foundation

Version: 2012-06-08

It was December 2011, and Winston Hao, founder and general manager of Datavast Inc. (Datavast), was deep in thought as he gazed out the window of his Beijing office with a cup of his favourite tea in hand.
He was both excited and anxious about his company’s prospects for the future. Since the company’s inception five years ago, Hao had heavily invested time, energy, and money into building this company, which designed, manufactured, and sold cloud storage products – that is, products that stored large amounts of digital data. After recently making major adjustments to the original product, Hao’s company was finally ready to push its newly revamped product onto the market. The only question was: Who should Hao target? He expected the small-to-medium enterprise (SME) segment would be the most price-sensitive, but it could also provide the fastest growth. On the other hand, the large-company segment permitted much higher unit contributions, but it also had a much longer buying cycle.
FORMS OF DATA STORAGE

Data storage devices allowed users to store digital files in a secondary location in order to prevent the loss of important information. Such devices came in many forms, depending on the needs of the user.
CD

CDs (Compact Discs), portable optical discs, were widely used by consumers for personal purposes and represented an inexpensive method of storing digital data. However, CDs were an undesirable method for businesses to store data because they could be easily lost, scratched or broken, thereby compromising the information stored on the device. CDs were often unreadable after they were made. The storage capacity of a CD was about 0.73 GB.1

1

B. Marshall, “How Analog and Digital Recording Works,” http://electronics.how stuffworks.com/analog-digital4.htm, 2011.

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S

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Portable external hard drives2 offered a user-friendly and mobile method of storing data with larger storage capacities. The storage capacities of these devices ranged from 160 GB to 2 TB.3 Portable external hard drives were more expensive than CDs, but they offered increased reliability since information was less likely to be corrupted after it was transferred to the device. Like CDs, portable external hard drives are easy to lose and damage. They are very susceptible to damage from shock, vibrations, and strong magnetic fields.4
USB Flash Drive

USB (Universal Serial Bus) flash drives5 were portable, rewritable, and physically smaller than their alternatives, and they could store up to 256 GB of data. It was common for data stored on USB flash drives to be unreadable. Flash drives also presented a significant security challenge for organizations, since their small size and ease of use allowed unsupervised visitors or employees to store and smuggle out confidential data with little chance of detection.
Cloud Storage

Cloud storage represents the process of saving data to an off-site storage system maintained by a third party.6 Instead of storing information to a computer’s hard drive or other local storage device, it could be stored in a remote database. In a “public cloud,” the user could access their data through the Internet.7 In a private cloud, this process was facilitated through the company’s intranet.8
Public Cloud
Public cloud storage offered several advantages over traditional storage methods. First, companies were required to pay only for the amount of storage they actually used, which helped reduce their expenses.
Since the service providers installed the physical storage devices in their own offices or data centres, public cloud customers gained significant storage and office space at their own locations. Companies were also relieved of maintenance responsibilities, as the responsibility for this process fell to the service providers. Adoption of this storage method was hindered by risk of compromised data security, since all data was stored at the third-party service provider’s location.
Private Cloud
According to the National Institute of Science and Technology, “Private cloud is infrastructure operated solely for a single organization, whether managed internally or by a third party and hosted internally or
2

Removable hard disk drives that established communication with a computer through connectivity options, such as USB.
“External Hard Drives – Including Portable and Desktop External Hard Drives,” Helpwithpcs.com, http://www.helpwithpcs.com/buy-guides/external-hard-drives.html, 2012.
4
USB Flash Drive, Winston Hao, personal interview by case writer, February 27, 2012.
5
Storage devices that include flash memory and an integrated USB interface.
6
J. Strickland, “How Cloud Storage Works,” http://computer.howstuffworks.com /cloud-computing/cloud-storage.htm, 2012.
7
F. Gens, “Defining ‘Cloud Services’ and ‘Cloud Computing,’” http://blogs.idc.com/ie/?p=190, September 23, 2008.
8
The
NIST
Definition of Cloud
Computing,
National
Institute
of
Standards
and
Technology,
http://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdf.
3

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Portable External Hard Drive

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externally.”9 This model had an advantage over the public cloud, as the data did not need to be stored with a third party. However, users still needed to buy a physical storage device, which had to be housed in their home office or data centre. A summary of differences between the private and public cloud can be found in Exhibit 1.
Integrated Backup Systems

Alternatively, integrated backup systems were offered by IT solution providers such as IBM Tivoli.
Providers of this service often bought hardware equipment from reputable vendors such as IBM and stored the company’s core data10 on it. These data storage and backup solutions had been available for over 10 years and were regarded as the most reliable option for data storage. They also offered the highest level of customization with state-of-the-art performance. Providers had very quick recovery times for compromised data. However, along with such strong performance came the kind of high prices that many smaller companies could not afford.
BUSINESS DATA STORAGE IN CHINA

Creating backup copies of important data constituted a relatively new concept in China, and a large proportion of the companies that were backing up data were, by North American standards, using outdated storage methods. Hao estimated that about 20 per cent of China’s small and medium-sized enterprises (SMEs)11 still used CDs as their primary form of data backup, while 30 per cent to 40 per cent used external hard drives, 40 per cent did not use any form of backup, and the rest used other methods.12
Most large companies 13 used integrated backup systems offered by large multinational service providers to store their core data, often at a cost of millions of RMB, and their non-core data was stored through a variety of outdated means.
Cloud computing was picking up very slowly in China due to fears of data leakage.14 Bankruptcy laws in
China were underdeveloped, and companies feared that small cloud-storage service providers would go bankrupt overnight, disappearing with all of their clients’ stored data. It was common for people working in service industries to sell client information, a practice that made it difficult for companies trust service providers with storing sensitive company information.
The concept of private-cloud storage was unfamiliar to the Chinese public, but, according to Hao, when
Chinese businesses were surveyed, they described their ideal storage solution as one that resembled private-cloud storage. However, since this concept was a new one, most companies were unaware of its existence. Datavast was one of the more established players in this relatively unknown market.
IT solutions were sold to businesses through either a systems integrator (SI) or an IT supplier, depending on the size of business. Large businesses and government organizations normally used SIs, who worked collaboratively with the IT departments of these organizations to provide full-package solutions. Large
9

The
NIST
Definition of Cloud
Computing,
National
Institute
of
Standards
and
Technology,
http://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdf.
10
Core data refers to data that is critical and of the highest importance to a company.
11
An SME is defined as companies with 200 to 500 computers.
12
Winston Hao, personal interview by case writer, February 27, 2012.
13
Large companies are defined as those with over 1,000 computers.
14
E. A. Alter, Y. Pang, R. Lin and G. J. Harris, “China’s Pragmatic Path to Cloud Computing,” http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Chinas_Pragmatic_Path_to_Cloud_Computing.pdf, May 2010.

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businesses were loyal to their SIs through strong, continuous working relationships, and SIs were highly familiar with their customers’ IT infrastructures and needs. Product developers relied on SIs to introduce and sell their products to their customers since large companies were not receptive to new product pitches or opportunities from parties with whom they lacked a connection. SIs met regularly with their customers.
At these meetings, they were responsible for identifying areas in their customers’ IT infrastructures that needed improvement and for educating and recommending new products that suited their customers’ needs. Their responsibilities also included technical support. The role of a SI resembled that of a consultative partner. When SIs made a sale, a product manufacturer, such as Datavast, would provide the
SI with the product. The SI then packaged the product into a solution package and marked up the price of each product in the package. The sales process for SIs and IT suppliers can be found in Exhibit 2.
SMEs mainly purchased from IT suppliers, and they were not necessarily loyal to a particular one of the many IT suppliers on the market. The IT suppliers competed based on low prices and sold individual components separately. Business customers generally approached IT suppliers looking for a particular product or solution, and the IT supplier would provide it at the lowest price possible. IT suppliers carried a large portfolio of products to sell, often including tens of thousands of items. IT suppliers did recommend products to customers on occasion if asked to do so, but they were not very knowledgeable about every product they had in stock.
DATAVAST

Datavast provided cloud computing storage products in China. Datavast had offices in Beijing and
Shanghai and sold to companies located in cities that possessed developed IT infrastructures. There were
30 employees in the company, including three salespeople.
Datavast was founded for the purpose of offering information backup services to companies through the public cloud, in partnership with China Telecom. This service was new to the Chinese market, and Hao hoped that a partnership with China’s largest telecommunications company would provide Datavast with credibility. However, Chinese businesses proved to be very resistant to the adoption of public cloud computing, and companies did not feel comfortable storing sensitive information with Datavast, even though it had a credible partner.
Hao discontinued its public-cloud storage and reinvented his business to focus on a product called the
Data Security Box. The company converted from a service provider to a product designer, manufacturer, and seller. The Data Security Box had the capacity to back up large quantities of information, encrypt it using the latest technologies, and store the information into a physical device that the client company could keep on its own site. With this product, companies did not need to worry about leaving sensitive information with a third party. These Data Security Boxes offered larger storage capacities than did CDs, external portable hard drives, and USB flash drives. Since Data Security Boxes were not removable, companies did not worry about losing them, and the boxes were designed to be resistant to breakage. The encryption function also prevented information from being leaked if the box were stolen. In addition, employees could access information through the company’s intranet from virtually anywhere. Hao also included features that provided company management with a means to limit employee access to the information stored in this box. He felt that these features made his box more attractive than the traditional storage alternatives, and his solution was significantly cheaper than the integrated back-up systems offered by large companies. The Data Security Box had no association with China Telecom.

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Since the private-cloud storage market in China was relatively new, Datavast did not have any major direct competitors. Hao had recently noticed a few small private-cloud storage companies beginning to emerge in the market, but these businesses were less established than Datavast. Portable hard drives represented the closest substitute for the Data Security Box.
Hao found that one of his company’s largest barriers to success stemmed from a lack of customer knowledge about his product. Extensive effort was needed in order to educate the public about the nature of private-cloud storage and about the capabilities of Hao’s product.
By 2011, five years into its operations, Datavast was still operating at a loss.
WINSTON HAO

In 2002, Hao left Canada in search of entrepreneurial opportunities in China. After working in Canada’s telecommunications industry for over 10 years and completing his EMBA at the Rotman School of
Business, Hao decided it was time to pursue his dream of building his own business. In his first few years in Beijing, he worked in the Chinese telecommunications industry to familiarize himself with the operating environment and search for new opportunities. A few years later, he spotted the growing need for data storage in China and launched Datavast.
Although Hao thoroughly enjoyed working to build up Datavast, he wanted to retire in five years.
Therefore, he was not keen on investing any more personal capital into the business before his retirement.
After five years of losses, his goal was to generate a positive net income this coming year with the launch of his new product. With cash flow from operations as the only source of funds Hao did not want to adopt a slow-growth strategy that would stress the company’s finite financial resources, and he did not want to increase overhead spending beyond the existing level of RMB200, 000 per year.
THE DECISION

After finishing the design of his new product, Hao needed to decide where to focus his attention and resources. Which segment was most suitable for his current situation? He decided not to segment by geographical region or industry as he did not see many differences in the needs of companies located in different geographical areas or different industries. However, the size of the company largely affected its needs and buying characteristics.
SMEs

Since SMEs were very price-sensitive, Datavast would need to significantly discount its prices in order to remain competitive. Hao estimated that he could sell each Data Security Box for approximately
RMB7,000 to an IT supplier, who would then mark up the price slightly to make a small margin on the sale. Since SMEs required a fairly standardized product, the standardized product was also cheaper than the not-so-standard product required by the large company segment to produce. The Data Security Box margins were close to 50 per cent, which took into account the servicing costs for each sale, as SMEs did not typically employ IT engineers or anyone with extensive knowledge in IT.
The selling cycle to SMEs was much faster than it was for large companies. Hao estimated that he could complete a sale and receive the payment in two to three weeks. Since Datavast was still in its start-up

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Large Companies

Large companies typically used integrated back-up systems, but they could use the Data Security Box for non-core data. Datavast could charge RMB400,000 to the SI, who would then mark-up that price to sell to its own customers. Hao was considering providing SIs with a 30 per cent margin on each sale in order to provide an incentive for the SIs to push the Datavast product as they made only a 10 per cent margin on most of their other products. These low margins stemmed from the fact that most of the SIs’ products came from well-known brands such as IBM and Cisco, who had very transparent prices in the industry.
Since Datavast’s Data Security Box was relatively unknown and customized, SIs would be able to earn higher margins on it without upsetting their customers. Datavast’s margin on these sales was 75 per cent to 80 per cent.
Sales cycles in this segment took two to three months, due to a significant amount of time spent on bureaucratic decision-making processes.
As Hao finished his tea, he decided it was time to map out an analysis and make a decision. He wondered what impact his decision would have on his company’s positioning and what steps he should take in order to make the decision a success.

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phase, cash was important for covering overhead costs. The company did not have a working capital loan at the time.

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Exhibit 1

Source:
S.
Lesem,
“Cloud
Storage for the
Enterprise
Part
2:
The
Hybrid
Cloud,” http://cloudstoragestrategy.com/2010/01/cloud-storage-for-the-enterprise---part-2-the-hybrid-cloud.html, January 25, 2010.

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COMPARISON OF PUBLIC CLOUD VERSUS PRIVATE CLOUD DATA STORAGE

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Exhibit 2

SME SALES PROCESS