They are some of the most ominous words that can reach the ears of a tech chieftain: "Microsoft is going to enter your space." Just ask Sony, Symantec, Yahoo! or, of course, Netscape. Even if Microsoft does not at first succeed — which often happens — it tries and tries again. And with billions in cash, stiff competition from Camp Redmond can be disheartening to almost any incumbent.

But this sort of thing is old hat to Intuit. "Depending how you count, this is Microsoft's sixth or seventh attempt to knock us out," CEO Steve Bennett says. "But we are geared up for battle."

Microsoft confirmed that it plans to launch its new Small Business Accounting product in September, which is a direct assault on Intuit's industry-leading QuickBooks software line, which caters to the mom-and-pops. QuickBooks-related software and other small-business products are Intuit's key engines; they account for about 48% of total sales, which were $1.8 billion in fiscal 2004. The California company also makes professional and consumer tax software like the popular TurboTax.

While it's seldom good to be under siege from Microsoft, it needn't be a disaster, Bennett argues. Intuit managed to stave off Money, Microsoft's 1991 assault on Intuit's Quicken personal-finance program. Intuit agreed to be acquired by Microsoft in 1994, but a year later the feds blocked the deal for anti-trust reasons. Intuit persevered and even flourished, widening operating margins from about 13% to 27%.

The good news is that accounting software is "sticky," meaning it's the kind of application that users don't like to switch from because of familiarity, institutional knowledge and cost. "It's mostly a battle for new users," Bennett contends. What Intuit has learned over the years is that competition from Microsoft usually increases awareness among potential customers, expanding the market. "Their entry will grow the category," Bennett says.

Last Thursday, Intuit's stock tumbled 5.5%, to about 44, after the company guided down earnings estimates slightly. The lower targets partly reflect costs for fighting Microsoft. But the market may be missing the bigger picture: Intuit said revenues for this fiscal year would be up 7%-10%. "Intuit remains a solid organic growth story," says Citigroup software analyst Tom Berquist.

Like the shares of security-software concern Symantec (SYMC: 16.72, -0.18, -1.1%), which faces a challenge from Microsoft in anti-virus software, Intuit's stock — down 10% since mid-July — might be in the penalty box because of the Microsoft threat, Berquist says. "My logic is that the overhang is in the stock already," says the analyst, who gives it a $55 price target and a Buy rating. The shares now trade at 19 times expected earnings.

Within six months, Berquist figures, it will become clear that Microsoft has more to learn about the market. And then, he says, "we should see a relief rally for Intuit."

As I noted in class, the most common answer was to view Microsoft and Intuit as "rivals." Let's go through Porter's discussion of Rivalry and see how well, if at all, the facts of the case meet the requirements for rivalry. According to Porter, the conditions for high rivalry are (1) Competitors are numerous or are rougly equal in size and power (2) Industry growth is slow (3) High fixed or storage costs (4) the product or service lacks differentiation or switching costs (5) Capacity is normally augmented in large increments (6) Competitors are diverse in their strategies, origins, personalities, and relationships to their parents. Let's take them one at a time.

First of all, there are not a large of competitors of equal size in this market. Microsoft is much larger than Intuit in total sales but much smaller with regards to sales in this market segment. Thus, condition 1 is not met.

We have very little information about the growth of the industry. It may be growing slowly but the case doesn't tell us this. What it does say is that should Microsoft enter, the segment would "grow the category." From this we might infer that whatever the growth rate, a MSFT entry will increase it. This makes it hard to argue that condition #2 is met.

We have little direct information about condition #3, the "height" of storage or fixed costs. It is important to keep in mind here that Porter's Five Forces framework was written primarily with "old economy" industries in mind. That does not, in general, negate the import of this "sub-point" but it does raise the question of its relevance for information industires. Much of what we associate with fixed costs, e.g. propery, plant, and equipment, are probably much lower for software firms than for automakers. And with the electronic delivery of software becoming more common each day, it is hard to think that "storage costs", however we might conceive of them, are anything other than negligible. Thus, condition #3 would not seem to be met.

At this point we are half way through the six "sub-points" of Porter's defintion of rivalry without any indication so far that rivalry exists to any significant degree. That said, I would caution you from concluding prematurely that rivalry is not present at all. The only thing that we ought to conclude at this juncture is that Rivarly, at least as defined by Porter, is not present in very high levels.

Condition #4 concerns the lack of differentiation in the product or service or the absence of switching costs. This is a condition to which the article speaks directly. The way you should have interpreted the statement about Intuit's software being "sticky" and that "users don't like to switch from because of familiarity, institutional knowledge and cost" is the clearest evidence you can find that there are, indeed, substantial switching costs. Thus, condition #4 is not met.

Condition #5, augmentation of capacity in large increments, is one about which we have little or no information. As with condition #3, it is one about which we might reasonably infer an answer. My understanding is that unlike the production of physical goods, information goods are not subject to the same economies of scale in production or, in this case, reporduction. There are no obvious reasons why increases in software production have to occur in large increments, i.e. 5,000 or 50,000 or 500,000 increases. Thus, my inclination is to say that this condition or rivarly is also not met.

The sixth and final condition, competitors are diverse in their strategies, origins, personalities, and relationships to their "parents", may be the only one that comes close to being met. MSFT and Intuit are, it would seem, very different firms and that they pursue different strategies. Instead of stating why, I am going to move on to consideration of the next "force" and reserve the right to ask you to answer this matter on the first midterm.

As noted above, the second most common answer was that MSFT was a new entrant. Given the way the article was written, it was not hard to see why many of you reached this conclusion. The two statement that showed up most often in this answer were the one about this being MSFT's sixth or seventh attempt to knock Intuit out of the market and, of course, the line from the opening sentence "Microsoft is going to enter your space." Still, one does have to ask an important question. Did MSFT ever really withdraw from the industry after its previously failed attempts? If so, then it may be appropriate to think of them as an new entrant. But given that it is their 7th try, are they a new new entrant or an old new entrant. If MSFT didn't really withdraw from the market after its failed attempts, then doesn't this make them a rival to Intuit, even if only an on-again-off-again one?

Finally, a few of you thought that MSFT's product and that by Intuit were substitutes. This is an answer that is clearly not justified by Porter's defintion. Recall that as he defines it, subsititutes are products that can perform the same basic function but come from a different industry. Under such a definiton, Coke and Pepsi are not substitutes because they are both produced by firms in the same "industry." Coke/Pepsi and a Starbucks coffee might be considered substitutes however because both perform the same function- they give a caffeine boost- but they come from very different industries. Admittedly, in the reading I gave you Porter's discussion on substitutes is under-developed compared to what he provides on the other forces. One place to get additional information is the QuickMBA site's page on Porter's Five Forces. I'll also try to provide you with more information on substitutes and complements over the course of the term.

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