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Adobe's Microsoft strategy

Knowledge@Wharton editors meet with Adobe CEO Bruce Chizen to discuss challenges, plans and competitive strategy against rivals such as Microsoft.

How Adobe plans to keep beating Microsoft
From Knowledge@Wharton
Special to CNET
April 17, 2004, 6:00 AM PDT

Adobe Systems is on a roll these days.

The San Jose, Calif.-based software company, best known for developing technology that allows Portable Document Format (PDF) documents to be exchanged, just had the most profitable quarter in its history.

In March, the company announced that fiscal first-quarter revenue was $423.3 million, compared with $296.9 million in the same period last year. With a revised revenue target of $1.5 billion for this year, Adobe Systems has come a long way since it was founded in 1982 by two alumni of Xerox's Palo Alto Research Center, John Warnock and Charles Geschke.

During the past two decades, Adobe's products have had a major impact on business processes in several industries. Its PostScript printer language, first shipped in printers from Apple Computer and QMS in 1985, revolutionized digital typesetting and made desktop publishing possible. In 1993, Adobe's Acrobat software introduced the PDF. Other products, such as Photoshop, won lots of loyal customers.

But brilliant technology does not necessarily create a successful business. By mid-1998, when most other technology companies were booming, Adobe was in trouble, experiencing stalled product sales and a sagging stock price. As part of a major corporate overhaul in August 1998, most of Adobe's executive management left the company, and Bruce Chizen was promoted to executive vice president of products and marketing.

Chizen led a drastic restructuring of Adobe's business, including instituting several rounds of layoffs and defending the company from a hostile takeover attempt by rival Quark. In 2000, Chizen was named the company's president and chief executive.

Now, Chizen is hoping to remake Adobe again--betting that by combining the core electronic document capabilities of its Acrobat products with a new collection of server-based products, Adobe Systems can become a major supplier of application solutions to enterprises. Last month, Knowledge@Wharton editors met with Chizen to discuss past challenges, future plans and competitive strategy against rivals such as Microsoft.

Q: Photoshop and Acrobat are doing very well. Last December, Fortune magazine named you one of the two best companies to work for in Silicon Valley. Looking back five years, what strategy drove this level of performance? Can it be sustained?
A: The answer to the second question is "yes." It can be sustained. Let me give you some background that can help show the strategy in context. Back in late 1998, we were a typical technology company. Our business processes--how we operated and managed the business--were not what they should have been. And we hit the wall sooner than everybody else.

How so?
In late August 1998, a couple things were coming at us. We had missed a key milestone on delivering Adobe Illustrator which, at that point, was a critical revenue component. We got caught by the first version of the Asian flu. The Japanese economy was tanking on us, and we didn't know. We did not have the ability to understand how well the business was doing. So we had a terrible mess. And that was a wake-up call for the company.

The two founders, John Warnock and Chuck Geschke, decided that there was a need for major change. They eliminated a number of people on the executive staff, and we decided to take a step back. We decided that we were going to focus the company on doing a few things well. We needed to streamline the organization and execute our strategy.

Keep in mind that at that time, the company had about $850 million in revenue. We had about $500 million to $600 million in cash and no debt. Our market cap was all of $1.6 billion. So, clearly, Wall Street had written us off. Anybody could have bought us with our own cash.

And Quark tried, right?
Quark tried, right around the same time. We were forced to grow up before everybody else. A lot of companies got caught in the dot-com bubble.

I would say our biggest challenge is that large corporations, universities and agencies don't know that we have mission-critical enterprise solutions.
By the time it burst, we had already refocused our business. Our strategy had several elements. First, we said we were going to focus on some key markets. We decided to concentrate on creative professionals and people who really cared about the quality of the information they communicated. We also decided to focus on document workflows and to streamline the company.

What did it take to formulate the vision for this change and to get people to buy into it--internally as well as externally?
The first part was relatively easy, because it was about survival. And this was in an environment in which employment was easy and attractive, so someone who left Adobe could get a job somewhere else with relatively little risk and a great deal of upside. In fact, back then, 20 percent of the people in the company were leaving on an annualized basis, which is a lot.

So, the people who chose to stay really saw the potential in this company. And because we had committed employees, the motivation to change was there. That was the biggest change. The second was delivering on the promise and demonstrating success. It was important that the employees felt proud about what they were doing; that they believed what they were doing was having an impact on the world.

What have been your biggest challenges?
One of my biggest challenges in taking over from two great founders has been trying to figure out how to change the company without destroying the culture John and Chuck built.

As we focus on the enterprise market, I would say our biggest challenge is that large corporations, universities and agencies don't know that we have mission-critical enterprise solutions. Yet, because of our reputation, they're willing to listen to us. So, when I go knocking on the door, I don't have a problem meeting with the chief information officer or, if it's critical, with the CEO, to talk about what Adobe's doing. They know us. They already use our products.

The third major challenge concerns outsourcing. In our case, it's not outsourcing; it's positions in low-cost labor markets. Adobe, I believe, made the right decision, back in the 1998-1999 time frame, to establish a site outside New Delhi, India. And it's been very productive for us.

Trying to do what's right for the business--and at the same time, making sure that the employees feel as if their job is relatively secure--is a tough balance. Every CEO I speak with who's honest about it is struggling with the same issue. I think that it's even harder for Adobe because we're so employee-centric.

Is it true that it's mostly work at the low end of the value chain that is being outsourced and that the more innovative work is still being done in the United States? Or is that changing as well?
We are a global company. Last quarter, we had 57 percent of the business come from outside the United States. We have to have global presence. Otherwise, we won't have products that recognize the cultural diversity of our customers.

You have had alliances with SAP and IBM, and you've used them to good effect. How have you managed them?
We are one of the few companies that has figured out how to create alliances with companies that compete against one another. If you think back to the early days, we were selling PostScript to Hewlett-Packard and Xerox. We were doing work in digital imaging with Eastman Kodak and Fuji Photo Film.

How to do view the competitive landscape, as you've tried to implement your strategy? What keeps you up at night?
We have a whole bunch of "point product" competitors: Quark against InDesign; CorelDraw is still alive against Illustrator; Global Graphics against PostScript; Macromedia Dreamweaver against GoLive.

But when I think about competitors, there's only one I really worry about. And it's one that happens to have $35 billion in revenues and $50 billion in the bank. And it happens to be in the software business. Microsoft is the competitor, and it's the one that keeps me up at night.

Microsoft's problems and challenges are so great that as a competitor, the company is less of a threat to Adobe.
Fortunately, Microsoft's problems and challenges are so great that as a competitor, it is less of a threat to Adobe. Microsoft has to grow its business--even conservatively, if you believe in 5 percent growth, which is a pretty conservative number--it has to grow the size of Adobe every single year. Microsoft also has lots of enemies, including the U.S. government, many of the state governments, and the European Commission--among others.

Most of Microsoft's competitors are big, with a lot of resources. So, on the enterprise side, it competes with IBM and SAP--and neither of those companies is anxious to see Microsoft win. On the consumer side, there are companies like Sony, which is not anxious to see Microsoft win. On the online services business, you have America Online and Yahoo, which are not happy to see Microsoft win. Microsoft has to worry about those very large competitors. Adobe is not its major concern.

Meanwhile, we get to partner with all Microsoft's enemies because we're a great alternative and we don't really compete head-on with any of its big competitors. That's our strategy against Microsoft.

We have learned, historically, that if we stay close to what we really do well, we win. Microsoft has tried to enter Adobe's markets. It tried in the early days, coming up with a PostScript clone--and it actually shipped one printer with an original-equipment manufacturer. It was a total failure. It tried with Microsoft Draw and Microsoft PhotoDraw, and it gave away the product free with Microsoft Office to kind of "nitch up" Illustrator and Photoshop. Again, it was total failure--these products no longer exist.

For eBook publishing, it tried Microsoft Reader as an end run around PDF. You never hear about Microsoft Reader anymore. Microsoft tried, once again, to go at Photoshop with Microsoft Picture It.

The company has never been able to move Picture It above the consumer level. So I am confident that, as long as we do what we do well, as long as we continue to execute, we'll be very successful, despite Microsoft's monopoly.

Why have Microsoft's attempts not worked? What's the source of your confidence?
The reason is that our customers care a lot about the visual integrity and reliability of the information that is being presented. And that's just not a core competency of Microsoft. We've been at this now for 20 years. Everything we do is based on Adobe's imaging model and rendering engine--that layer between the operating system and the application that allows us to express information in a way Microsoft has trouble figuring out.

It doesn't mean that Microsoft won't eventually get it right, but as long as we keep moving ahead rapidly, they'll never be able to catch up.

You've documented a number of your key architectures: PostScript, PDF, and--albeit somewhat reluctantly--the Type 1 font format. But these are not open-source initiatives, nor are they official standards controlled by standards bodies like the World Wide Web Consortium. Although Adobe documents these formats, it alone still controls them. Have you found a profitable middle ground between proprietary architectures and open source?
With PostScript and PDF, we found that publishing the specifications--making them open, but not open standards, but not providing open source--is the right path for us. Once something becomes a standard driven by a standards body, it moves at a glacial pace. And innovation slows down significantly because you have to get everybody to agree and there's lots of compromise. If you make it totally open source, you don't get a return on investment.

We believe that by opening up the specification, we allow other people to take advantage of it. But because we still own the source, we get to innovate around that standard more quickly than anybody else. We have found that to be a great balance. PDF is the best example of that. We work on Acrobat, we work on PDF, we announce the product, we ship it, and we open up the specification.

We're already working on a whole series of applications, and we're already working on the next version of PDF. It seems to work. Customers are willing to pay a price--and even a premium--if they believe what they're buying is innovative and reliable.

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