Red Hat
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Introduction
By 1999, Linux was the worlds fastest growing open source server operating system in the world. In addition to its acceptance by main stream corporate America, an increasing number of companies were choosing it over Microsoft NT. In parallel, Red Hat was growing and gaining more market share in the open-source software market. Red Hat primarily packaged and distributed the Linux operating system, significantly simplifying the installation and upgrade process for firms choosing to use the Linux system. Red Hats growth and success to date made them an attractive candidate for an initial public offering (IPO) of stock to become a publicly owned and traded company. On August 11, 1999, Red Hat stock opened at $14 per share and within two days had increased drastically to $82.25 per share.
Problem Statement
Red Hat, a $5 billion dollar company, would now answer to shareholders and the general market. Red Hats new shareholders expect continued growth in return for their investment. Based upon their valuation of the company at almost six times its opening price, they also expected substantial returns on their investment.
Red Hats internal situation was that of a $5 billion company that was barely profitable and had yet to determine its long term strategy. Moreover, Red Hat had not yet addressed its most critical strategic issue: Should Red Hat begin to develop application software for Linux , and if so, should it produce the software using an open-source or proprietary approach?
Analysis
1. Linux operating systems product characteristics, production process, and its users/customers.
Linux, like Microsoft Windows, is a computer operating system. An operating system is defined in the case glossary as, “the software that interacts directly with the computers hardware, providing an environment for applications to run. Application programmers can take advantage of the services provided by the operating system to perform common system functions like printing, file management, and network communication.” Linux is unique because it was developed and continues to evolve, through open-source development. This involves widespread access to the code base of the evolving product, allowing programmers from around the world to contribute new features, test new versions, and write patches to fix errors that are discovered. In addition to the programmers, the users (companies and organizations) can understand how the program operates and make any changes they desire to customize it for their needs. In contrast, Microsoft Windows is developed, protected, and licensed by Microsoft. Users do not have access to Microsoft Windows base code, nor can they modify or customize it.
Linux is the culmination of an effort that has persisted for nearly twenty years to develop an open-source operating system. None of the contributors “own” the product. A core group of developers maintain design responsibility. Below them, the product is divided into several modules, each with its own maintainer. Users continually submit patches and new features which are incorporated into the newest version of the program. The new versions are frequently updated on the web-site, sometimes daily. This continual updating is balanced with occasional code freezes (every six to twelve months) resulting in a stable version that remains available while new changes and updates get incorporated into another version. The aspects of Linux that appeal to users (flexibility, adaptability, and sharing through open-source) also complicate things for its users: it is a very robust operating system, complicated to install, and difficult to maintain patches and updates. For example, it requires 36 hours to download a new version of Linux .
Users of Linux include corporations, small businesses, organizations, universities, and a growing number of individual computer users. These users select Linux for its flexibility and adaptability, but many lack the time and resources to install and update new versions. This created a niche market for Red Hat: adapting the core operating system to the massive amount of data submitted by over 10,000 programmers.
2. Use the input-transformation-output model to describe Red Hats business model as a Linux distributor. What are the inputs and outputs of this “production” system? Which transformation functions does Red Hat perform? What values does Red Hat add?
In the input-transformation-output model, the input is the over 600 different software packages and 573 mega-bytes of open-source that makes up the Linux operating system. The continuous evolution of this code can be viewed as another input, as well. The operating system is accessible in cyber-space, so this input could be viewed as a hybrid of both a material and a resource. It is an intellectual material and a resource that can be repeatedly accessed.
Regarding the transformation process, Red Hat compiles the massive Linux operating system onto a CD, which it then packages and delivers to customers in a much more user-friendly configuration. The physical transformation is the manufacturing of the CD with the added value of programs developed by Red Hat. The two most significant programs Red Hat has developed and added are an installer program and the Red Hat Package Manager (RPM), which integrates the releases of the 600 plus software packages updates that occur on different schedules into one coherent package. The CDs are sold online, mail-order, via value-added sellers (VARs) like CompUSA and Best Buy, and pre-installed on new machines through original equipment manufacturers (OEMs). In addition to the physical manufacture of the CD, Red Hat performs an exchange by providing a service via their customer service and support, which include three types of service: Consulting and Professional Services, Training and Certification, and Technical Support.
The outputs of the transformation process include a finished good, a continuing service, and customer satisfaction. The finished good is simply the CD and its accompanying manuals. The service is the varying levels and degrees of services Red Hat offers. Finally, Red Hat must satisfy customers. As a seller and distributor of something that is free, Red Hats survival is dependent upon customer loyalty and sustained interest in the updated releases of the entire Red Hat Linux software package and its service offerings.
3. Conduct a basic SWOT analysis to reveal Red Hats position in the software