How Oracle can Bounce Back from Sales Hit
Oracle Corp. had its slowest growth over a quarter in more than six years. Its cloud revenue typically grows at a rate of 52 percent (over the last eight quarters), but in the first fiscal semester of 2018, it only grew 32 percent. A 32 percent clip over three months is tremendous growth for a large firm like Oracle, but it is low compared to its tech industry competition. Oracle’s rivals followed more in line with their eight-month trend in the last quarter. Oracle’s databased is mature, and investors are looking for Oracle to venture into new endeavors like cloud-based products. Oracle is late to the game in this segment of the market, whereas, Amazon has held most market share. Amazon has created many new “cloud-based products”, including the Echo and Fire TV.
While reading this article, I asked myself a few questions. How do firms forecast sales while they don’t know what its competitors are creating? How do firms plan for a dip in sales? How can the company adjust to unexpected changes in demand?
These questions can be answered by the topics we covered in class pertaining to sales and operations planning. APICS defines sales and operations planning as the “process to develop operational plans that provide management the ability to strategically direct its businesses to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of supply chain.” The purpose of sales and operations management is to optimize trade-offs, maximize profits, and, ultimately, satisfy the customer. To achieve these goals, a firm must gather data, forecast demand, supply planning, have a pre-SOP meeting, and, to culminate, have an executive SOP meeting.
Oracle forecasted its demand for “cloud-based products” to grow along its eight-month trend, instead it only grew just over half of the average they predicted. This was caused by Oracle being a late-adaptor to the cloud-based sector of the tech industry. To overcome or combat a big loss over a quarter, month, or year, a firm can think ahead and take measures before it suffers a sales hit. A firm can forecast demand and plan capacity to create detailed plans and schedules to fight a sales loss. Detailed planning happens daily, the planners hold the accountability, and aggregation level by AKU, line, and parts.
The first step in achieving solid sales and operations management is gathering data. While gathering the data, it’s vital that the data is precise. If not the demand forecast and planned inventory will be inaccurate. This can cause a company, like Oracle, to over produce. Over production leads to inefficient usage of time and less profit. A great dip in quarterly demand (20% for Oracle) for a big company, can lead to millions of dollars in profit losses. Oracle over produced its cloud based goods, and in a tech industry that is ever-changing, that over production may lead to products sitting on the shelf forever. A strong grasp on sales and operations planning will maximize profits and satisfy the customer’s needs without having to increase production or expand a firm.
Article:
https://www.bloomberg.com/news/articles/2018-03-20/oracle-has-its-head-in-the-cloud-but-can-t-see-the-horizon
As we hit on last week, forecasting is extremely important for a company. Forecasting sales projections can lead a company to determine inventory they need on hand, employers they need to work, whether they need to expand to new locations, and other extremely important aspects of a company. The problem with forecasting is that the forecasts can be wrong. As you have said here, Oracle was forecasting higher growth than it did. Because they did not hit their projections, Oracle let their shareholders down, but also they may have made other adjustments based on their forecasts that are no longer necessary. One of the other really important aspects of forecasting is having the systems in place to properly and efficiently use the forecasts that the forecasting team creates. If a company does not use the forecasts well, there is no point in forecasting. This lack of growth may have been bad news for Oracle, but Oracle did receive some good news recently, google lost an appeal Tuesday that they had violated copyright laws in using oracle’s software in their Android platform. This brought nearly $9 billion to Oracle, this may not have been the growth they were forecasting before, but they may be closer to hitting their revenue targets now (http://money.cnn.com/2018/03/27/news/companies/google-oracle-case/index.html).
In addition to better preparing the company for a sales downturn proper forecasting will allow companies to better manage their share price. This month Oracle’s stock price is down roughly 14% on a poor quarterly report. While the company beat analyst’s predictions for earnings per share the limited growth in their cloud services division is a significant contributor to the issue. If companies can use forecasting to better anticipate when they will fall below expectations they can release their own estimates, which will better prepare the shareholders. While in Oracle’s case they also they are also suffering due to the comparative success of their competitors using this technique in the future may enable them to prevent such major stock price declines in the future.
https://www.cnbc.com/2018/03/20/oracle-orcl-stock-tanks-on-q3-earnings-results-cloud-skepticism.html
I disagree with the statement that Oracle “overproduced” their cloud based services. I believe that Oracle was late to the competition and have thrown out products to compete with other cloud based services, such as Amazon who controls a dominant section of the market. They recently have received large bumps in sales as they are the new competitor on the market, but they now must look to refine their products and make themselves competitive in an emerging billion dollar market. Oracle must look to refine their products to best fit their customer base. They must advertise themselves in the B to B market where the majority of these transactions are taking place. This will revitalize their sales projections for coming quarters and put them back on pace to take advantage of such a large and emerging market in the business sector. As a software giant with the resources to make this happen they are perfectly positioned in order to take advantage of this opportunity. Oracle’s executives in this scenario likely overestimated their success based off of just entering the market and Amazon’s success as well as wanting to look good to shareholders and the board of directors. I believe that Oracle has a valid chance of making their products to be able to rival Amazon’s web based services for businesses but it will be a long up hill battle to gain market share in this market as the first to occupy the space typically has a massive advantage over all of the other competitors in the market.
Great post Benjamin! As we have covered in class, sales forecasting is one of the most essential pieces of supply chain management. Companies need to know the number of products to produce in order to maximize their revenue and efficiency. For most companies, this procedure is fairly straightforward, weighing figures of previous sales and new products, while also taking into account for economic conditions. For tech firms like Oracle however, the playing field is constantly shifting. Technology is expanding and advancing every single day. With a large number of firms competitively developing new products, there is always the “big new item” that is bound to come into the market. Producers or consumers are likely unable to predict this, because many companies, like Apple are very secretive when it comes to the development of their products.
I very much agree that in the tech industry more than any other, as Ben noted, being late to the game is a severe hinderance. Technology is constantly evolving and changing and slowed growth is never good, with it being probably the most obvious sign that the company is being surpassed by its competitors. Yes, it is only one quarter, which shouldn’t cause immense panic for investors. Nonetheless, for Oracle to so significantly miss their forecast may point to their lack of knowledge about the market they’re in. As Blake stated, refining their products to what they believe they can best offer to customers will help regain some of their sales, and better solidify their place in the industry. Also, I think another significant aspect in the precision of estimates is the ability to factor extremely recent data into forecasts. Developing forecast methods and equations through automation or whatever means a company uses to seamlessly integrate new data on a massive scale would greatly help in getting the most accurate forecasts possible, and would lessen the chances of missing a quarter benchmark as much as Oracle did.