Dropbox-Case Study

Technology Strategy

Professor Christian Peukert

Spring Semester, 2019

Case Analysis

Dropbox: “It Just Works”

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Introduction. This report aims to analyse the Dropbox case. Therefore, a short introduction of Dropbox is necessary. Dropbox’s strategy will be critically reflected and then, based upon the findings, strategic recommendations for the future of Dropbox will be provided.

Dropbox presents their mission as “We’re here to unleash the world’s creative energy by designing a more enlightened way of working” (Dropbox). The company’s mission reflects their continuous efforts to try to provide the most simplistic and practical product, making the life of their customers easier.

In order to analyze and answer the case the team resorted to an external analysis of the market and an internal analysis of the company itself. The goal was to better understand the context they are inserted and also were Dropbox positions itself.

Porter’s 5 Forces. In order to have a global view of the most relevant forces that constrain companies and competition in the market we thought this framework could be beneficial.

Firstly, we analysed the Threat of New Entries, which we considered to be very high, as a result of the large amount of tech companies and startups present in the market. In addition, the barriers of entry are quite low as there are few sunk or entry costs to the market and also there is no need for infrastructures.

Subsequently, we evaluated the Bargaining Power of Suppliers as being low and continuously decreasing as GB storage prices have been dropping over the past years, while the number of potential suppliers entering the market keeps increasing.

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As a result, allows companies to easily replace and change suppliers.

In contrast, we found the Bargaining Power of Customers to be high, considering that lots of companies are offering similar products on the market and that the costs for switching providers are fairly low.

Additionally, the Threat of Substitution is very high on account of offline solutions like a flash drive or a disk that were still the preferred option when it came to storing data, especially at the time of the product launch. Consequently, the company needs to keep investing in R&D and to educate the consumers about the advantages of online storage solutions in order to sell their product and make revenues.

Lastly, we recognize that Rivalry Among Existing Players is high, since differentiation from the competition proofs to be extremely difficult, the market entry requirements are low and the market is growing significantly.

In conclusion, we acknowledge that the most relevant forces that constrain companies and competition are The New Entries and Threat of Substitution, both we considered very high.

Dropbox’s business model (as presented in the case). Dropbox has made changes in the product throughout time but it is important to mention that its core value proposition remains the same: a service easy to handle, quick and safe.

The first key elements of Dropbox’s business model are the accessibility, safety and simplicity of the product. Using a freemium model, the company offers both free and premium accounts where customers have to pay a usage and subscription fee. Each user has access to their folders through all devices.

Dropbox provides online storage and reliable backup services addressing easily risk-averse customers. This service is provided through Amazon’s Simple Storage Service (S3) cloud storage platform. By outsourcing this service, Dropbox avoids infrastructure investments and is able to scale rapidly. The company partnerships with big distribution channels in order to sell the product already installed in different devices. As an example we have HTC and Dropbox agreement, in which HTC distributes 5GB free dropbox storage on Android phones.

Another important element of Dropbox’s business model is its strategy of offering a single product/version for all users, specifically individual users. This strategy – Trojan horse – allowed the company to target people using the product inside companies to further enter into the B2B market automatically. Dropbox relies its marketing strategy mainly in word-of-mouth and viral marketing, rather than paid advertisements. Another approach used by Dropbox to acquire customers is through a diffusion of its service. Dropbox encourages its customers to increase their free storage space (up to 16GB), by inviting new users to Dropbox community. The company is able to serve a wide international customer base, however the principal market is the domestic market in the US with 32.7% of the users (Exhibit 6).

After discussing the main features of Dropbox’s business model and its strategy to conquer the market, we used the VRIO-Analysis to evaluate if Dropbox was able to create a competitive advantage out of their product and business model innovation, and if so, further assessed if the advantage would be sustainable in the future. The VRIO-Analysis is consisting of four distinct elements that help to understand and identify the source of a sustained competitive advantage (Barney 1991, p.105).

In a first step, we evaluated if the company’s product is valuable, meaning is it adding value to both customer and company by exploiting opportunities or eliminating threats (Barney 1991, p.106). In the case of Dropbox, the company was able to deliver a product that was based on a superior algorithm, offering cloud storage space to customers and enabling them to seamlessly share, sync and store data among different devices. In doing so, they offered their customers new opportunities to manage and store their data, thereby adding value and entering a new market space with lots of growing potential. Hence, their product can be considered valuable.

Moving on, we assessed in a second step if the product was rare compared to the existing solutions in the market. A product, resource or strategy is considered to be rare if it is not simultaneously implemented by a large number of firms competing in the same market space (Barney 1991, p.106). Dropbox dedicated a lot of its product development on delivering a seamless experience to its customers by creating a unique code that is working across different platforms and is optimizing the way data was transferred from the hardware to the cloud, in order to avoid long loading times and data transmission failures. Accordingly, they were able to launch a product that was superior to the other cloud based solution already existing in the market, letting it qualify as being rare.

After establishing that Dropbox’s product was in fact valuable and rare, we proved that Dropbox gained a competitive advantage over its competition. However, if that competitive advantage can be considered sustainable remains to be seen and is part of the next two steps of the VRIO-Analysis.

In order to be sustainable a company’s product should be inimitable or hard to imitate. A product is inimitable if other companies lack the required resources to imitate the product or are incapable of understanding or implementing them properly (Barney 1991, p.107). Since Dropbox’s major advantage over the competition stemmed from a superior code that was able to deliver a higher quality product to the customer, we looked into the future development of the industry after 2008. Evidently, Dropbox was not able to protect its advantage over the competition, since their algorithm became an industry standard among the bigger players in the market. Hence, the product was not inimitable.

Lastly, we looked into the organisational structure and evaluated if Dropbox was organized enough to capture the value created by the product. As a matter of fact, Dropbox initially faced a large imbalance when it comes to diversity of expertise and know-how within the organization. The founders of Dropbox focused on recruiting new employees with a technical background, thereby neglecting to also account for a sufficient presence of managerial expertise in the company. As a result, Dropbox failed at the beginning to set up a proper marketing strategy and stumbled upon extensive customer acquisition cost. Consequently, they were initially not well organized enough to reap the benefits of the superior product. However, it needs to be mentioned that the company accounted for that problem in the future and hired experienced staff in order to get back on track.

After doing the VRIO-Analysis we found that the company was having a competitive advantage over its competition but was not able to sustain it as the elements of the product that were unique, proved to be easy to imitate. Furthermore, the organizational structure was at the beginning not able to capture the value of the product and allow for strong market entry.

Google as an example for the threat of well developed and established market entrants. After establishing that Dropbox had an edge over the competition due to their superior product, but was very unlikely to sustain that advantage, we considered an alternative scenario, in which Google would have entered the market at the same time as Dropbox did. Since Google had already positioned itself as one of the largest corporations on the internet/ digital industry by the time Dropbox started its business in 2007 and was well known for its famous search engine, it is fair to assume that a market entry of Google simultaneous to Dropbox’s market entry, would have changed the competitive landscape significantly. Google would have not faced major issues that were concerning the industry, thus would have probably used a different approach when it comes to the business model, products characteristics and marketing efforts in order to successfully conquer the online backup and storage service market.

Business Model | It is plausible that Google would have segmented the market to target corporations and private consumers individually, since they had the Google search engine and therefore superior data and data analysis capabilities, enabling them to create more customer-centric solutions to fulfill the needs of different customer segments. Furthermore, they had the existing infrastructure and reputation to ensure a high-quality product and the required security standards for their Cloud storage solution, especially towards business customers, which was one of the initial obstacles, Dropbox was facing.

In addition, they would have probably offered more than 2Gb free storage capacity to its customers as a means of aggressively gaining market share and driving competitors out of the market.

Product Characteristics | Unlike Dropbox, Google would have most likely not focused on creating a product that is accessible via any platform or device but would have rather fostered the integration of the product into its own Google ecosystem in order to promote its own products and lock-in customers on their own platforms. Especially a pre-installation of the cloud solution on the internet browser “Google Chrome” and the smartphone operating system “Android”, both launched in late 2008, could have created great synergies for Google. The distribution of the product to the end-consumer, one of the major obstacles for the whole industry, would have been easily overcome, giving Google an edge over the competition early on. Moreover, Google could have excluded competitive products from its platforms in order to dry out the competition and create a monopoly for its own cloud storage solution.

Marketing Strategy and Customer Acquisition | The third distinction between Google and Dropbox can be expected within their marketing efforts. As opposed to Dropbox, Google was an already established company with years of marketing experience, strong analytical capabilities, and a strong brand with a good reputation among business and private consumers. Google would have used the consumer data, gathered through the Google search engine to identify potential customers and target them individually with a customized online advertisement. In doing so, they would have created a very cost-efficient marketing process since they are utilizing their own infrastructure and would simultaneously ensure that all marketing efforts are steered towards customers that are already interested in the product or likely to buy.

Looking at the implications of a theoretical market entry of Google simultaneous to Dropbox for the industry, it is likely that the competitive landscape would have changed significantly, since Google would have utilized its brand, analytic capabilities and marketing expertise to take over the market and drive incumbents in the market out of competition. Especially Dropbox would not have had the time to overcome its obstacles and change its marketing strategy in order to convenience and educate customer over the advantages of their own cloud storage solution.

Prospects regarding Dropbox’s profitability. After having look into a theoretical scenario of Dropbox facing heavy competition from Google early on the process, we looked into the actual development of Dropbox and its prospects for profitability. In the beginning, Dropbox struggled a lot when trying to acquire new customers, they started by paid advertising but soon realized that it was not sustainable in the long run. Houston’s team changed strategies and focused on organic growth. They accepted that it was much easier and less costly to acquire customers through word-of-mouth and viral marketing. Rapidly, their number of users grown, however just a few were on paying basis (the conversion ratio of free users into paying subscribers were still very low).

In 2010, Dropbox has 2% to 3% of paying users which leads to revenues of 10 to 15 million, given the storage costs of 0,11 per free users and 3,18 per paying user, I would say they may not be profitable yet. Nevertheless, assuming that over the years storage costs will decrease drastically, they are likely to become profitable. When talking about the future, Houston is keen on taking advantage of the growing market which is likely to grow 28%, a 2.5-billion-dollar market in 2014. Besides, and taking into account, the technological world we live in, this market has a huge potential to grow even more and if Dropbox adopts the right strategies, they will be profitable in a close future.

However, going deeper into the Dropbox case, and looking at today’s data, we realized that Dropbox is not profitable yet. Despite their impressive growth over the years and the increase of paying users and therefore revenues, Dropbox keeps reporting losses because they insist on investing the money on product development so that they can enhance it and eventually have a higher conversion rate of free users into paying subscribers. Due to high R&D and Marketing costs (besides other expenses such as cost of revenues and SG&A costs) they have never been able to be profitable, but now they aim to increase the number of business users who pay a much higher fee than other paying subscribers, which eventually will lead to an increase in the average revenue per paying user. Analysts are expecting Dropbox to turn profitable this year (2019), nonetheless we can not neglect the fearless market in which Dropbox is competing and ignore huge players such as Google. As mentioned above, Google has been able to take advantage of their position in the market (both infrastructure and reputation), to create a better product and defeat their opponents, being the company with the largest market share, at the moment. .

Conclusion and Recommendations. After deeply analyzing the case and the frameworks regarding Dropbox, we believe Houston should follow an aggressive strategy aiming to increase growth and profits at a high pace.

Threats | Considering that the costs per GB are reducing and that the market itself is growing rapidly, the threat of Google or other major players being interested in joining the market is increasing and becoming more evident day by day. On top of that, Dropbox faces a serious threat of demand exceeding supply, in the way that there are only 25 employees and the company is growing at a very fast pace and their number of clients follows the same rhythm. Lastly, Dropbox may suffer some losses in which regards their business customers segment, as eventually they might prefer more segment-specific services like the one Carbonite is offering. As these are all imminent threats, Dropbox should position itself in as a solid player in the market.

Recommendations | The company should revise their partnerships and attempt to develop agreements with PC and tech manufacturers besides Android (e.g. Asus, Linux) to have Dropbox app pre-installed in the computers, tablets and other devices in order to defend themselves from the Android expansion.

Furthermore, segmenting their target into individual users and companies in favor of covering a broader amount of clients, identifying their unique needs and testing the offers for each segment separately, will certainly be beneficial to get usable and valuable feedback to improve their products. Additionally, we could recommend Dropbox to perform for example A/B testings, as it was used before by the company and seemed to have reliable results and feedback. This tests would include different features according to each segment being tested.

In order to maintain a favorable retaining rate of individual customers the company should consider the creation of a loyalty program in which Dropbox would be able to continuously collect feedback from customers and award with special features or discounts long-term paying users. In what regards business customers, Dropbox could offer workshops and seminars, on an annual basis, to instruct the business’ employees on how to use Dropbox with the final purpose of incentivizing the company to remain with the product and not switch to a competitor. Within this segment, Dropbox could also create a separate version for small businesses to broaden their target market (e.g. a special package for start-ups with company features for a special price and with the capacity for 1 to 6 users).

Lastly but most importantly, they should have a R&D department focused only in research, developing and testing new features for the purpose of keep improving the existing product or even to expand Dropbox to new market niches, while having in parallel an extremely strong marketing and sales team, with the important mission of creating and developing strong awareness and association of the Dropbox brand. Therefore, it will enable the company to have a flexible strategy and to be able to adapt to new competitors and products in a more rapid way without incurring into many losses.

Conclusion | Although there is a growing concern with competitors Dropbox needs to bare in mind their MVP and their main competencies. Before making any decision, the company should keep in mind the preservation of their identity so that it does not incur into risks of making changes that will destroy more value than what they add to customers. Houston has a clear analysis of the risks of an expansion mistake and the growth pains that Dropbox may incur from their next decision.

Appendix

SWOT FRAMEWORK

VRIO FRAMEWORK

References

Barney, J.B. 1991. Firms Resources and Sustained Competitive Advantage. Journal of Management, 17: 99-120.

Dropbox Website (2019): Company Info

Eisenmann, T. R., Pao, M., & Barley, L. (2012). Dropbox: “It Just Works”. Harvard Business School.