What Is Lexar’s Main Strength in Digital Photography? What External Development Within the Environment Made This Strength Particularly Important and Relevant?

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Another reason is the sales to OEM which made up about 35% of Lexar’s revenues in 2000. The problem with this sale strategy is that the Digital camera manufactures typically bundled low capacity, private label starter flash cards with their cameras, and this meant low margins for Lexar because of the declined average selling per megabyte for flash cards as I explained in the previous paragraph.

Lexar’s low margins was also because of the licensing and royalty payments due to lack of Lexar’s own established standards. Unlike its competitor SanDisk, which had been aggressive about establishing standards for flash form factors, Lexar had not been able to establish any of the flash card standards. One important example of this is the Secure Digital Card whose exclusive rights are owned by Toshiba, Matsushita, and SanDisk.

Another point that harmed Lexar’s margins was the manufacturing costs due to lack of any vertical integration. SanDisk was vertically integrated, having formed a strategic partnership with Toshiba for joint development and manufacture of flash memory. However, Lexar had not been able to establish any vertical integration and was suffering from a long chain of manufacturing process which is completed in several different companies located in different areas. Lexar’s research and development group designed the controllers, but a subcontractor in Taiwan manufactured them and another firm completed the packaging in California.

Lexar’s margins were also low because of the patent litigation fights with its primary competitor SanDisk. Since Lexar was trying to defend its speed advantage, it had many patent lawsuits against SanDisk. These lawsuits were a burden not only for the management but also the technical stuff. Ongoing series of potential patent suits were keeping the technical team busy and ending with waste of resource allocations.

Question 4: Suppose Eric Stang decides not to enter the USB flash drive market, as he feels that Lexar’s competitive advantage in digital photography cannot be effectively transferred into that market, despite the similarity in the basic technologies. Provide, and elaborate on, five reasons for why he came to that decision.

Eric Stang decides not to enter the USB flash drive market because of misalignment with the current strategy, lack of differentiation opportunities, lack of resources, undeveloped market, and concerns about bad reputation.

The main reason Eric Stang decides no to enter the USB flash drive market is the new USB strategy was misaligned with the current strategy which was focusing solely on the market for digital photography. Lexar had been focusing entirely digital photography, and trying to seize the market for end-to-end digital photography solutions. A pure memory product, targeted at the general computer user, would not fit into this focused strategy, spreading thin and losing power.

The second reason is the lack of differentiation opportunities. Lexar owed its success so far to its product differentiation strategy thanks to its powerful R&D department. However, there was uncertainty that it could differentiate its product in the USB market. In contrast to digital photography, where professionals valued extra features and provided a halo for Lexar’s brand, flash drives lacked an obvious high end segment.

Another reason is the lack of resources. Lexar was highly resource constrained since the company had initiated a broad layoff, reducing headcount by 27%. The organization was still recovering from this painful experience, and employees were stretched. It was uncertain that whether there was room to pursue a totally new product area.

One of the important reasons is that being an early mover in the USB market might be risky since the market was not matured yet. No other firm except a small firm M-Systems had any significant revenues, although there were a number of entrants. M-Systems was not expected to become a de facto standard for storing data. If Lexar entered the market it would have to deal with the entire risk associated with developing a new technology and creating a new market for it. Another risk would be future shifts in USB technology or customer needs. So being an early mover in an undeveloped market is very risky for Lexar.

The fifth reason is concerns about Wall Street’s reaction. Lexar had been respected because of its reputation of focused strategy. Once Lexar lost this reputation, expanding to a market which is not related to digital photography, Lexar might lose value, and if the share price remained depressed for too long, Lexar would have a valuation problem as a takeover target.